Wildhorse Company is considering the acquisition of Ayayai, Inc. To assess the amount it might be willing to pay, Wildhorse makes the following computations and assumptions. A. B. C. Ayayai, Inc. has identifiable assets with a total fair value of $6,019,000 and liabilities of $3,721,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Ayayai, Inc. Ayayai, Inc's pretax incomes for the years 2020 through 2022 were $471,300, $573,100, and $374,600, respectively. Wildhorse believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings: Depreciation on Buildings (each year) Depreciation on Equipment (each year) Extraordinary Loss (year 2022) Salary Expense (each year) 382,500 34,100 133,500 171,500 The normal rate of return on net assets for the industry is 15%.
Wildhorse Company is considering the acquisition of Ayayai, Inc. To assess the amount it might be willing to pay, Wildhorse makes the following computations and assumptions. A. B. C. Ayayai, Inc. has identifiable assets with a total fair value of $6,019,000 and liabilities of $3,721,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Ayayai, Inc. Ayayai, Inc's pretax incomes for the years 2020 through 2022 were $471,300, $573,100, and $374,600, respectively. Wildhorse believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings: Depreciation on Buildings (each year) Depreciation on Equipment (each year) Extraordinary Loss (year 2022) Salary Expense (each year) 382,500 34,100 133,500 171,500 The normal rate of return on net assets for the industry is 15%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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need correct answer this time with working
Transcribed Image Text:Wildhorse Company is considering the acquisition of Ayayai, Inc. To assess the amount it might be willing to pay, Wildhorse makes the
following computations and assumptions.
A.
B.
C.
Ayayai, Inc. has identifiable assets with a total fair value of $6,019,000 and liabilities of $3,721,000. The assets include office
equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a
fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used
by Ayayai, Inc.
Ayayai, Inc's pretax incomes for the years 2020 through 2022 were $471,300, $573,100, and $374,600, respectively.
Wildhorse believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future.
However, it may need to consider adjustments for the following items included in pretax earnings:
Depreciation on Buildings (each year)
Depreciation on Equipment (each year)
Extraordinary Loss (year 2022)
Salary Expense (each year)
382,500
34,100
133,500
171,500
The normal rate of return on net assets for the industry is 15%.
Transcribed Image Text:(a)
Your answer is correct.
Assume that Wildhorse feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing
excess earnings. Based on these assumptions, calculate a reasonable offering price for Ayayai, Inc. Indicate how much of the price
consists of goodwill. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to O decimal places e.g.
58,971.)
Goodwill
Offering price
(b)
SA
Your answer is incorrect.
Goodwill
SA
Offering price
Assume that Wildhorse feels that it must earn a 15% return on its investment, but that average excess earnings are to be
capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Ayayai, Inc. Indicate how
much of the price consists of goodwill. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to O
decimal places e.g. 58,971.)
$
385,875
$
2,683,875
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