Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Estimated Book Values Market Values Total identifiable assets $585,000 $750,000 Total liabilities 320,000 320,000 Owners' equity $265,000 Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash losses of $48,000. Alpha Company expects a return on its investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.) Part 1: Compute (a) an offering price based on the information above that Alpha might be willing to pay and (b) the amount of goodwill included in that price. Part 2: Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of $625,000 cash.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
Show steps
Alpha Company is considering the purchase of Beta Company.
Alpha has collected the following data about Beta:
Beta Company Estimated
Book Values
Market Values
Total identifiable assets $585,000
$750,000
Total liabilities
320,000
320,000
Owners' equity
$265,000
Cumulative total net cash earnings for the past five years of
$850,000 includes extraordinary cash gains of $67,000 and
nonrecurring cash losses of $48,000.
Alpha Company expects a return on its investment of 15%.
Assume that Alpha prefers to use cash earnings rather than
accrual-based earnings to estimate its offering price and that it
estimates the total valuation of Beta to be equal to the present
value of cash-based earnings (rather than excess earnings)
discounted over five years. (Goodwill is then computed as the
amount implied by the excess of the total valuation over the
identifiable net assets valuation.)
Part 1:
Compute (a) an offering price based on the information above
that Alpha might be willing to pay and (b) the amount of
goodwill included in that price.
Part 2:
Compute the amount of goodwill actually recorded, assuming
the negotiations result in a final purchase price of $625,000
cash.
Transcribed Image Text:Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Estimated Book Values Market Values Total identifiable assets $585,000 $750,000 Total liabilities 320,000 320,000 Owners' equity $265,000 Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash losses of $48,000. Alpha Company expects a return on its investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.) Part 1: Compute (a) an offering price based on the information above that Alpha might be willing to pay and (b) the amount of goodwill included in that price. Part 2: Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of $625,000 cash.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Investment in Stocks
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education