Pack Casual Wear has the following balance sheet on December 31, 2005:

Normal annual net income averages 32% of equity in this industry. Pack regularly expects to earn $230,000 annually. The balance sheet amounts are reasonable estimates of market values for both assets (except goodwill) and liabilities. In negotiations to sell the business, Pack proposes to mea¬ sure goodwill by capitalizing at a rate of 10% the amount of above-normal net income. The po¬ tential buyer believes that goodwill should be valued at eight times the amount of above-normal net income.

Required 1. Compute the amount of goodwill as proposed by Pack.
2. Compute the amount of goodwill as proposed by the potential buyer.
3. The buyer purchases the business for the net asset amount (assets less liabilities) reported on the December 31, 2005, balance sheet plus the amount proposed by Pack for goodwill. What is the buyer’s purchase price?
4. If the buyer earns $200,175 of net income in its first year after acquiring the business under the terms in part 3, what rate of return does the buyer earn on this investment for the first year? Is the goodwill asset amortized or not? Explain.

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Assets Cash.... Merchandise inventory Buildings Accumulated depreciation-Buildings Land Total assets Liabilities and Equity Accounts payable Long-term note payable Total equity Total liabilities and equity $ 138,700 607,950 $451,500 210,800 240,700 192,400 $1,179,750 $ 98,325 414,050 667,375 $1,179,750