Exercise$1$A$-1($LO$9)$Estimatinggoodwill$.$ GreenCompanyisconsideringacquiringthe assets of Gold Corporation by assuming Gold$$s liabilities and by making a cash payment. Gold Corporation has the following balance sheet on the date negotiations occur:

APPENDIX EXERCISE

Gold Corporation Balance Sheet January $1,2016$

Assets

Accountsreceivable $............$ Inventory $.....................$ Land......................... Building$($net$)..................$

Equipment$($net$)................$ Totalassets..................

$$100,000100,000100,000220,000$

$280,000$

$$800,000$

Liabilities and Equity

Totalliabilities $.................$ Capital stock $($$$10$ par$)..........$ Paid$-$in capital in excess of par $....$ Retainedearnings $..............$

Totalliabilitiesandequity $......$

$$200,000100,000200,000300,000$

$$800,000$

Appraisals indicate that the inventory is undervalued by $$25,000,$ the building is underva$-$ lued by $$80,000,$ and the equipment is overstated by $$30,000.$ Past earnings have been consid$-$ ered above average and were as follows:

Year

$20112012201320142015$

Net Income

$ $90,000110,000120,000140,000*130,000$

$*$Includes a nonrecurring gain of $$40,000.$

It is assumed that the average operating income of the past five years will continue. In this industry, the average return on assets is $12\%$ on the fair value of the total identifiable assets.

$1.$ Prepareanestimateofgoodwillbasedoneachofthefollowingassumptions:

a$.$ Thepurchasingcompanypaidforfiveyearsofexcessearnings. b$.$ Excess earnings will continue indefinitely and are to be capitalized at the industry normal

return. c$.$ Excess earnings will continue for only five years and should be capitalized at a higher rate

of $16\%,$ which reflects the risk applicable to goodwill.

$2.$ Determine the actual goodwill recorded if Green pays $$690,000$ cash for the net assets of Gold Corporation and assumes all existing liabilities.