Question
The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with
The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 35% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by S. Company.
B. S. Companys pretax incomes for the years 2018 through 2020 were $700,000, $935,000, and $550,000, respectively. P. Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:
Depreciation on Buildings (each year) 580,000
Depreciation on Equipment (each year) 30,000
Extraordinary Loss (year 2020) 200,000
Salary Expense (each year) 300000
Rent expenses (each year) 25000
C. The normal rate of return on net assets for the industry is 15%.
D. Assume that P. Company feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, answer question (1-5):
2. The normal earnings =
Group of answer choices
$535000
$4700000
$510000
$680000
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