EXERCISE 1-3 Estimated and Actual Goodwill L07 Passion Company is trying to decide whether or not to acquire Desiree Inc. The following bal- ance sheet for Desisee Inc. provides information about book values. Estimated market values are also listed, based upon Passion Company's appraisals Desie Inc Desine Inc Market Values Book Values Current assets $ 260,000 740,000 $1,000,000 $ 400,000 $260,000 650,000 910,000 $400,000 160,000 350,000 Property, plant & equipment (net) Total assets Total liabilities Common stock, $10 par value Retained earnings Total liabilities and equities $910,000 Passion Company expects that Desiree will earn approximately $150,000 per year in net in- come over the next five years. This income is higher than the 12% annual return assets considered to be the industry "norm. on tangible Required A. Compute an estimation of goodwill based on the information above that Passion might be willing to pay (include in its purchase price), under each of the following additional as- sumptions: (1) Passion is willing to pay for eces earnings-fot counted). expected life of five years (undis- an (2) Passion is willing to pay for acess earnings for in exphcted life of five years, which should be capitalized at the industry normal rate of retarin (3) Excess earnings of return of 20% because of the risk involved. are expected to last indefinitely, but Passioir demands a higher rate B. Comment on the relative merits of the three altermatives in part (A) abost, C. Determine the amount of goodwill to be recorded on the books if Pasion-pays $800,000 cash and assumes Desiree's liabilities