Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

EXERCISE 1-3 Estimated and Actual Goodwill LO 7 Passion Company is trying to decide whether or not to acquire Desiree Inc. The following balance sheet

image text in transcribed
image text in transcribed
EXERCISE 1-3 Estimated and Actual Goodwill LO 7 Passion Company is trying to decide whether or not to acquire Desiree Inc. The following balance sheet for Desiree Inc. provides information about book values. Estimated market values are also listed, based upon Passion Company's appraisals. Desiree Desiree Inc. Inc. Book Market Values Values Current assets $260,000 $ 260,000 Property, plant & 650,000 equipment (net) _740,000 Total assets $910,000 $1,000,000 Total liabilities $400,000 $ 400,000 Common stock, 160,000 $10 par value Retained earnings _350,000 Total liabilities $910,000 and equities Retained earnings _350,000 Total liabilities $910,000 and equities Passion Company expects that Desiree will earn approximately $150,000 per year in net income over the next five years. This income is higher than the 12% annual return on tangible assets considered to be the industry norm." 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 assumptions: 1. Passion is willing to pay for excess earnings for an expected life of five years (undiscounted). 2. Passion is willing to pay for excess earnings for an expected life of five years, which should be capitalized at the industry normal rate of return. 3. Excess earnings are expected to last indefinitely, but Passion demands a higher rate of return of 20% because of the risk involved. B. Comment on the relative merits of the three alternatives in part (A) above. C. Determine the amount of goodwill to be recorded on the books if Passion pays $800,000 cash and assumes Desiree's liabilities

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing And Assurance Services

Authors: Timothy Louwers, Robert Ramsay, David Sinason, Jerry Strawser

2nd Edition

0073128244, 9780073128245

More Books

Students also viewed these Accounting questions

Question

How will these issues affect the grade levels you will teach?

Answered: 1 week ago

Question

Explain the pages in white the expert taxes

Answered: 1 week ago