Question
The net assets of Ohana Ltd., excluding goodwill, have a total fair value of $ 4 million, and earnings for the past five years total
The net assets of Ohana Ltd., excluding goodwill, have a total fair value of $ 4 million, and earnings for the past five years total $ 2.2 million. Included in the latter figure are non-recurring gains and losses of $ 200,000 and $ 140,000 respectively, as well as sales commissions of $ 25,000. A 10% return on identifiable net assets is considered normal for the industry and annual excess earnings are to be capitalized at 16% in arriving at goodwill in developing a sales price for the business.
Instructions: Calculate the company's goodwill. Label all calculations.
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