ACC202 Corporate Accounting

Early 2020, A company is considering to acquire B company aiming to earn 25% return on its investment. B company has total fair value of $6,000,000 identifiable assets and 3,950,000 liabilities with normal rate of return 11% on net assets. The assets include office furniture with a fair value equals book value, office equipment with a fair value 15% higher than book value, and land with a fair value 70% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by B Company.

B Company pretax incomes for the years 2017 through 2019 were $750,000, $850,000, and $800,000, respectively. A Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. The following are included in pretax earnings:

Depreciation on furniture (each year)	$80,000
Depreciation on office equipment (each year)	$30,000
Sales commissions (each year)	$30,000
Extraordinary loss (year 2019)	$45,000

Required:

1. Determine a reasonable price that A company is willing to offer B company assuming that goodwill is estimated by capitalizing excess earnings approach. Ignore tax effects. (8 marks)
2. Determine a reasonable price that A company is willing to offer B company assuming that goodwill is to be estimated by excess earnings capitalized for four years at 16% rate of return. (4 marks)
3. Differentiate between parent company concept and economic entity concept in terms of consolidated net income and consolidated balance sheet values? (3 marks)