Valix Finacc vol 1 Problem 20-25

Financial Accounting Volume 1 2008 Valix-Peralta
Chapter 20 Problem 20-25

Average earnings or prior years (1,500,000 / 3)                                                               500,000

Increase in average earnings (10% x 500,000)                                                       50,000

Total                                                                                                                               550,000

Less: Patent amortization (500,000 / 5 years)                                                                  100,000

Earnings for goodwill computation                                                                               450,000                                                                                                                                             

a. Average future earnings                                                                                            450,000

    Divide by                                                                                                                           8%

    Net assets including goodwill                                                                                 5,625,000

    Less: Net assets excluding goodwill                                                                        5,000,000

    Goodwill                                                                                                                    625,000

                                                                                                                                               

b. Average earnings                                                                                                       450,000

    Less: Normal earnings (8% x 5,000,000)                                                                       400,000

    Average excess earnings                                                                                              50,000

    Divide by                                                                                                                          10%

    Goodwill                                                                                                                    500,000

c. Goodwill (50,000 x 3.17)                                                                                              158,500