Time to Write Down Goodwill: Pick a Number On 1/1/06, Pong Inc. acquired 100% of Spinner Inc.’s outstanding common stock. Spinner’s net assets (excluding goodwill) had a current value of

$4,000,000.

Pong estimated that Spinner would have $700,000 of average annual earnings for the foresee¬

able future, a 17.5% return on the $4,000,000 of its net assets at current value. For this industry, a 15% return on equity was considered normal. Accordingly, the expected superior earnings were

$100,000 (2.5% X $4,000,000). Pong agreed to pay for five years of expected superior earnings, discounted to its present value. In choosing a discount rate, a minimum of 10% was established, inasmuch as this was deemed appropriate for a relatively risk-free investment. Pong added to the 10% minimum an extra 10% for the additional risk associated with this industry. Thus, a 20%

discount rate was used in arriving at the present value of the goodwill to be paid for, the calcula¬

tion of which follows:

Expected superior earnings . $100,000 Present value factor for an annuity of 5 years at 20% . 2.9906 Goodwill calculated . $299,060 Accordingly, the purchase price was $4,300,000. This is $4,000,000 for the current value of the net assets and $300,000 (rounded) for the goodwill.

For 2005 and 2006, Spinner reported annual earnings of approximately $650,000 (approxi¬

mately $50,000 below initial expectations). The shortfall was attributable partly to overly opti¬

mistic projections and partly to new product innovations introduced by competitors. Management does not expect Spinner’s future annual earnings to increase beyond $650,000. Pong is amortizing the goodwill over a five-year life.

Required How much should the unamortized goodwill be written down to at 12/31/07 (two years later)?