Louis Inc. bought a business that is expected to give a 20% annual rate of return on the investment. Of the total amount paid for the business, $100,000 was deemed to be goodwill, and the rest was attributed to the identifiable net assets of the business purchased.

Louis Inc. estimated that the annual future earnings of the new business would be equal to the average normalized earnings per year of the business over the past four years. The total net income over the past four years was $750,000. This amount included a gain on discontinued operations of $50,000 in one year and an unusual and non-recurring loss of $80,000 in one of the other three years.

Instructions

1. Calculate the amount that Louis Inc. paid to purchase the business? Show the needed calculations. (4 marks)
2. Calculate the fair value of the identifiable net assets that Louis purchased in this transaction. (2 marks)