Question: Green Company is considering acquiring the assets of Gold Corporation

Green Company is considering acquiring the assets of Gold Corporation by assuming Gold’s liabilities and by making a cash payment. Gold Corporation has the following balance sheet on the date negotiations occur:
Appraisals indicate that the inventory is undervalued by $25,000, the building is undervalued by $80,000, and the equipment is overstated by $30,000. Past earnings have been considered above average and were as follows:
Year Net Income
2011 .......... $ 90,000
2012 .......... 110,000
2013 .......... 120,000
2014 .......... 140,000*
2015 .......... 130,000
*Includes a nonrecurring gain of $40,000.
It is assumed that the average operating income of the past five years will continue. In this industry, the average return on assets is 12% on the fair value of the total identifiable assets.
1. Prepare an estimate of goodwill based on each of the following assumptions:
a. The purchasing company paid for five years of excess earnings.
b. Excess earnings will continue indefinitely and are to be capitalized at the industry normal return.
c. Excess earnings will continue for only five years and should be capitalized at a higher rate of 16%, which reflects the risk applicable to goodwill.
2. Determine the actual goodwill recorded if Green pays $690,000 cash for the net assets of Gold Corporation and assumes all existing liabilities.

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  • CreatedApril 10, 2015
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