Homework Help is Here – Start Your Trial Now!
Business
Accounting
Only answer part1

Only answer part1

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
Only answer part1
Legume Company is trying to decide whether or not to acquire Peanut Inc. The following balance sheet for Peanut Inc. provides information about book values. Estimated market values are also listed, based upon Legume Company's appraisals. Peanut Inc. Peanut Ic. Book Values Market Values Current assets $260,000 S 260,000 Property, plant & equipment (net) 650,000 740,000 Total assets $910,000 SI,000,000 Total liabilities $400,000 $ 400,000 Common stock, $10 par value 160,000 Retained earnings _350,000 Total liabilities and equities $910,000 Legume Company expects that Peanut will earn approximately $150,000 per year in net income over the next five years. This income is higher than the 12% annual return on tangible assets considered to be the industry "norm." Part 1: Compute an estimation of goodwill based on the information above that Legume might be willing to pay (include in its purchase price), under each of the following independent scenarios: A. Legume is willing to pay for excess earnings for an expected life of five years (undiscounted). What amount of goodwill would Pasion be willing to pay? B. Legume is willing to pay for excess earnings for an expected life of five years, which should be capitalized at the industry normal rate of return. What amount of goodwill would Pasion be willing to pay? C. Excess earnings are expected to last indefinitely, but Legume demands a higher rate of return of 20% because of the risk involved. What amount of goodwill would Pasion be willing to pay? Part 2: Determine the amount of goodwill to be recorded on the books if Legume pays $800,000 cash and assumes Peanut's liabilities.
Transcribed Image Text:Legume Company is trying to decide whether or not to acquire Peanut Inc. The following balance sheet for Peanut Inc. provides information about book values. Estimated market values are also listed, based upon Legume Company's appraisals. Peanut Inc. Peanut Ic. Book Values Market Values Current assets $260,000 S 260,000 Property, plant & equipment (net) 650,000 740,000 Total assets $910,000 SI,000,000 Total liabilities $400,000 $ 400,000 Common stock, $10 par value 160,000 Retained earnings _350,000 Total liabilities and equities $910,000 Legume Company expects that Peanut will earn approximately $150,000 per year in net income over the next five years. This income is higher than the 12% annual return on tangible assets considered to be the industry "norm." Part 1: Compute an estimation of goodwill based on the information above that Legume might be willing to pay (include in its purchase price), under each of the following independent scenarios: A. Legume is willing to pay for excess earnings for an expected life of five years (undiscounted). What amount of goodwill would Pasion be willing to pay? B. Legume is willing to pay for excess earnings for an expected life of five years, which should be capitalized at the industry normal rate of return. What amount of goodwill would Pasion be willing to pay? C. Excess earnings are expected to last indefinitely, but Legume demands a higher rate of return of 20% because of the risk involved. What amount of goodwill would Pasion be willing to pay? Part 2: Determine the amount of goodwill to be recorded on the books if Legume pays $800,000 cash and assumes Peanut's liabilities.
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Basic Accounting Terms
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
SEE MORE TEXTBOOKS