[go: up one dir, main page]
Scribd
Upload
123 views3 pages

Advanced Accounting Problem 1.1 - 1.3

This document contains exercises calculating goodwill based on rate of return on assets, excess earnings, and expected future cash flows. In exercise 1-1, the document calculates goodwill of $394,668 based on a target's excess earnings above its normal rate of return of 15% on assets. In exercise 1-2, goodwill is calculated as $225,279 based on discounting the target's excess earnings. Exercise 1-3 evaluates three assumptions to calculate goodwill for a company with expected future cash flows of $78,000 above its normal earnings. Assumption 2 is identified as the best approach as it discounts the excess earnings to calculate goodwill of $281,173.

Uploaded by

NadyaAnanda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
123 views3 pages

Advanced Accounting Problem 1.1 - 1.3

This document contains exercises calculating goodwill based on rate of return on assets, excess earnings, and expected future cash flows. In exercise 1-1, the document calculates goodwill of $394,668 based on a target's excess earnings above its normal rate of return of 15% on assets. In exercise 1-2, goodwill is calculated as $225,279 based on discounting the target's excess earnings. Exercise 1-3 evaluates three assumptions to calculate goodwill for a company with expected future cash flows of $78,000 above its normal earnings. Assumption 2 is identified as the best approach as it discounts the excess earnings to calculate goodwill of $281,173.

Uploaded by

NadyaAnanda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Nadya Ananda Pertiwi

2201818656

LA53

Exercise 1-1

a) Rate of Return on Assets: 15%

Fair Value of Assets $15,000,000


Fair Value of Liabilities (8,800,000)
Fair Value of Net Assets 6,200,000
Normal Rate of Return 15%
Normal Earnings $ 930,000

Pretax Income of Condominium, Inc. 2012 $1,200,000


Additional Depreciation on Building ($960,000 x 30%) (288,000)
Target’s Adjusted Earnings, 2012 $ 912,000
Pretax Income of Condominium, Inc. 2013 $1,500,000
Additional Depreciation on Building (288,000)
Target’s Adjusted Earnings, 2013 $1,212,000
Pretax Income of Condominium, Inc. 2012 $ 950,000
Add: Extraordinary Loss 300,000
Additional Depreciation on Building (288,000)
Target’s Adjusted Earnings, 2013 $ 962,000
Target’s three year total adjusted earnings $3,086,000
Target’s three year average adjusted earnings ($3,086,000/3) $1,028,667

Expected Target Earnings $1,028,667


Less: Normal Earnings 930,000
Excess Earnings, per year $ 98,667
Excess Earnings: $98,667/25% = $394,668

Net Assets $6,200,000


Estimated Goodwill 394,668
Implied Offering Price $6,594,668
b) Excess Earnings of Target (same as Part A) $ 98,667
PV Factor (Ordinary Annuity, 3 years, 15%) x 2.28323
Estimated Goodwill $ 225,279
Fair Value of Net Assets 6,200,000
Implied Offering Price $6,425,279

Exercise 1-2

a) Net Cash Earnings for the Past 5 years $850,000


Add: Non-recurring Cash Losses 48,000
Extraordinary Cash Gains (67,000)
Five years Cash Earnings $831,000
Annual Cash Earnings ($831,000/5) $166,200

Future Cash Earnings $166,200


PV Factor (Ordinary Annuity, 5 years, 15%) x3.35216
Estimated Goodwill $557,129

Estimated Goodwill $557,129

Fair Value of Beta’s Assets $750,000


Fair Value of Beta’s Liabilities (320,000)
Fair Value of Beta’s Net Assets 430.000
Implied Offering Price $987,129

b) Purchase Price $625,000


Beta Company’s Book Value of Owner’s Equity 265,000
Goodwill $890,000

Exercise 1-3

a) Fair Value of Assets $ 1,000,000


Fair Value of Liabilities (400,000)
Fair Value of Net Assets $ 600,000
Normal Rate of Return 12%
Normal Earnings $ 72,000
Expected Cash Earnings $150,000
Normal Earnings $ 72,000
Excess Earnings $ 78,000
Assumption 1 : $78,000 x 5 = $390,000
Assumption 2 : Excess Earnings x PV Factor (Ordinary Annuity, 12%, 5 years)
: $78,000 x 3.60478 = $281,173
Assumption 3 : Excess Earnings / Rate of Return = $78,000 / 20% = $390,000

b) Assumption 1 provides the same payment every year and did not meet the time value of
many criteria. Assumption 2 provides the best option because it is the right calculation
and the most cost-effective method. Assumption 3 is a solution to figuring out the rate if
it’s not discounted.

c) Purchase Price $800,000


Desiree’s Fair Value of Net Assets (600,000)
Goodwill $200,000

You might also like