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need help! will give thumbs up for a quick responce! Paulo Company is looking for your advice concerning whether or not to acquire Stinger Company
need help! will give thumbs up for a quick responce!
Paulo Company is looking for your advice concerning whether or not to acquire Stinger Company (Stinger) in an asset acquisition transaction. The following balance sheet for Stinger provides information about book values. Estimated market values are also provided, based upon Paulo Company's appraisals. Stinger has earned an average of $390,000 per year over the past five years. However, this included $350,000 of gains (during these five years) that will not recur. The difference between cash basis and accrual basis earnings are not considered to be material during this time period. Paulo expects a return on its investment of 15% per year. Paulo identifies a five year time period as the appropriate length of time to expect earnings to continue. Paulo will base its offering price on the present value of the cash basis earnings over this time period. Required: A. Compute the offering price that Paulo will be willing to pay based on the present value of cash earnings. (The present value of an ordinary annuity of $1 for 5 years at 15% is 3.35216.) B. Determine the amount of goodwill included in this offering price. C. If the final negotiated price is $1,220,000, which includes Paulo assuming Stinger's liabilities, what is the amount of goodwill that will be recorded in this purchase transaction? D. Assume that the final negotiated price is $1,220,000 but Paulo also agrees to an additional payment of $150,000 to the former owners of Stinger if revenues exceed $1,500,000 per year for the first two years after acquisition. The fair value of this earnout payment is estimated to be $100,000 at the date of acquisition. Prepare the journal entry to record this acquisition of assets transaction including this additional payment, as appropriate Step by Step Solution
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