Estimating Goodwill and Valuation Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Estimated Book Values Total identifiable assets $585,000 Total liabilities 320,000 Owners' equity $265,000 Market Values $750,000 320,000 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.) Required: 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. 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
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Estimating Goodwill and Valuation
Alpha Company is considering the purchase of Beta Company.
Alpha has collected the following data about Beta:
Beta Company Estimated
Book Values
Total identifiable assets $585,000
Total liabilities
320,000
Owners' equity
$265,000
Market Values
$750,000
320,000
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.)
Required:
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.
2. Compute the amount of goodwill actually recorded,
assuming the negotiations result in a final purchase price of
$625,000 cash.
Transcribed Image Text:Estimating Goodwill and Valuation Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Beta Company Estimated Book Values Total identifiable assets $585,000 Total liabilities 320,000 Owners' equity $265,000 Market Values $750,000 320,000 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.) Required: 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. 2. Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of $625,000 cash.
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