Caswell Company is contemplating the purchase of LaBelle Company as of January 1, 2016. LaBelle Company has
Question:
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The following information exists relative to balance sheet accounts:
a. The inventory has a fair value of $200,000.
b. The land is appraised at $100,000 and the building at $600,000.
c. The 9% bonds payable have five years to maturity and pay annual interest each December 31. The current interest rate for similar bonds is 8% per year.
d. It is likely that there will be a payment for goodwill based on projected income in excess of the industry average, which is 10% on total assets. Caswell will project the average past five years€™ operating income and will pay for excess income based on an assumption of a 5-year life and a risk rate of return of 16%. The past five years€™ net incomes for LaBelle are as follows:
2011 ........... $120,000
2012 ........... 140,000
2013 ........... 150,000
2014 ........... 200,000 (includes$40,000 extraordinary gain)
2015 ........... 180,000
Required
1. Provide an estimate of fair value for the bonds and for goodwill.
2. Using the values derived in part (1), record the acquisition on the Caswell books.
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Step by Step Answer:
1 Bonds Present value of interest payments for 5 years at 8 27000 39927 107...View the full answer
