Naughty Company assembles the following data relative to a certain entity in determining the amount to be paid for net assets and goodwill: Assets at fair value before goodwill 2, 600, 000 Liabilities 900, 000 Shareholders’ equity 1, 700, 000 Net earnings after elimination of unusual or infrequent items: 2008 200, 000 2009 230, 000 2010 300, 000 2011 250, 000 2012 270, 000 Required: Calculate the amount of goodwill under the following: 1. Average earnings are capitalized at 10% 2. A return of 8% is considered normal on net assets at fair value. Excess earnings are capitalized at 15%. 3. A return of 10% is considered normal on net assets at fair value. Goodwill is measured at 5 years excess earnings.
Naughty Company assembles the following data relative to a certain entity in determining the amount to be paid for net assets and
Assets at fair value before goodwill 2, 600, 000
Liabilities 900, 000
Shareholders’ equity 1, 700, 000
Net earnings after elimination of unusual or infrequent items:
2008 200, 000
2009 230, 000
2010 300, 000
2011 250, 000
2012 270, 000
Required:
Calculate the amount of goodwill under the following:
1. Average earnings are capitalized at 10%
2. A return of 8% is considered normal on net assets at fair value. Excess earnings are capitalized at 15%.
3. A return of 10% is considered normal on net assets at fair value. Goodwill is measured at 5 years excess earnings.
4. A return of 10% is considered normal on net assets at fair value. Excess earnings are expected to continue for 10 years.
Goodwill is measured by the present value method using a 12% rate. The present value of an ordinary annuity of 1 at 12% for 10 years is 5.65.
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