Problem 5.In line with Charles Company's expansion program, it has become interested in acquiring a plant in Mindanao to handle many of its production functions in that area.One prospective seller is Sincere Co whose owners have decided to sell their business if a proper settlement can be obtained.Sincere's statement of financial position appears as follows:

Current AssetsP4,500,000Current LiabilitiesP2,400,000

Investments1,500,000Non-current Liabilities3,000,000

Property, plant & Equipment12,000,000Ordinary shares1,500,000

Share Premium5,100,000Retained Earnings6,000,000

TotalP18,000,000TotalP18,000,000

Charles has hired Kent appraisal Co. to determine the proper price to pay for Sincere Co.the appraisal company finds that the investments have a fair value of P4,500,000 and the inventory is understated by P2,400,000.All other assets and equities are properly stated.An examination of the company's incomefor the last 4 years indicates that the net income has steadily increased.In 20 19, the company had a net operating income of P3,000,000, which is expected to increase 20% each year over four years.Charles believes that a normal return in this type of business is 18% on net assets.The asset investment in the Mindanao plant is expected to stay the same for the next four years.

According to Kent Appraisal Co., the fair value of Sincere can be estimated in many different ways.Calculate an estimate of the value of Sincere, assuming that any goodwill will be computed as

1.The capitalization of the average excess earnings of Sincere Inc.at 18%.

a.P44,840.b.36,000,000c.P18,286,416d.P26,840,000

2.The purchase of average excess earnings over the next four years.

a.P24,364,800b.P19,591,200c.P30,960,000d.P22,831,200

3.The capitalization of average excess earnings of Sincere at 24%

a.P31,500,000b.P24,630,000c.P18,381,888d.P98,520,000

4.The present value average excess earnings over the next four years discounted at 15%. (the present value of an ordinary annuity of 1 at 15%% for four periods is 2.85498.)

a.P31,792,979b.P55,932,484c.P22,542,844

5.If Charles were to pay P23,100,000 to purchase the assets and assume the liabilities of Sonia, how much would be charged to goodwill

a.P8,840,000b. P 6,364,800c.P0d.P5,100,000