Karen Corporation is negotiation with Julius Corp. to purchase all of Julius Corp.'s net assets and assume

all liabilities.

You have been asked to help develop a tentative offer price which will include the least amount of

goodwill involved (since Karen shall be paying the net assets at FMV plus additional amount which shall

correspond to the goodwill.)

Karen made available to you the following information about the books of Julius Corp.

BV FMV

Current Assets 550,000 700,000

Non-current assets* 2,650,000 **2,800,000

Current and Noncurrent Liabilities 900,000 900,000

Total accumulated Net income from 2016-2020*** 1,800,000

*Book value includes a P200,000 goodwill and P1,500,000 depreciable assets with an average remaining

useful life of 5 years. The balance was attributed to the land whose fair value approximated its book

value.

**Excludes the goodwill.

***Included in the accumulated earnings above is an annual presidents' bonus averaging to P50,000

and an gain on sale of equipment in 2018 at P200,000.

The normal earnings of similar companies within the industry is 10%.

You were given the following options by which goodwill shall be computed:

a) Purchase of goodwill in the form of 5 years excess earnings.

b) Capitalize excess earnings at 25%

c) Capitalize average earnings at 10%

d) Present value method assuming current effective rate is at 10% (5 years)

Requirements:

1. Compute for the goodwill under each option above:

2. Compute for the purchase/acquisition price under each option above:

3. What is the best option on the point of view of the acquiring company?