Batts Company's balance sheet on December 31, 1990, is as follows:

In Batts Company's industry, earnings average \(11 \%\) of common stockholders' equity. Batts Company, however, is expected to earn \(\$ 198,900\) annually. The owners of Batts Company believe that the balance sheet amounts are reasonable estimates of fair market values except for goodwill. In discussing a plan to sell the company, they argue that goodwill should be recognized by capitalizing the amount of earnings above average at a rate of \(20 \%\). On the other hand, the prospective purchaser argues that goodwill should be valued at four times the earnings above average.
\section*{Required}
1. Calculate the amount of goodwill claimed by Batts Company's owners.
2. Calculate the amount of goodwill according to the purchaser.
3. Suppose the purchaser finally agrees to pay the full price requested by Batts Company's owners. If the expected earnings level is obtained and the goodwill is amortized over the longest permissible time period, what will be the net income for the first year after the company is purchased?
4. If the purchaser pays the full price requested by Batts Company's owners, what percentage of the purchaser's investment will be earned as net income the first year?

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Cash Merchandise inventory. Buildings Accumulated depreciation. Land Total assets Accounts payable. Long-term note payable. Common stock. Retained earnings. Total liabilities and owners' equity. $ 170,100 245,700 756,000 (198,450) 425,250 $1,398,600 $ 113,400 295,200 706,500 283,500 $1,398,600