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ADVANCED ACCOUNTING CHAPTER 1 Problems 1-2 Porter Company is trying to decide whether to acquire Ellis Inc-ANSWER KEY (INSTANT DOWNLOAD)
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ADVANCED ACCOUNTING by JETER
CHAPTER 1 Problems
1-2 Porter Company is trying to decide whether to acquire Ellis Inc. The following balance sheet for Ellis Inc. provides information about book values. Estimated market values are also listed, based upon Porter Company's appraisals.
Ellis Inc. Ellis Inc.
Book Values Market Values
Current Assets $ 450,000 $ 450,000
Property, Plant & Equipment (net) 1,140,000 1,300,000
Total Assets $1,590,000 $1,750,000
Total Liabilities $700,000 $700,000
Common Stock, $10 par value 280,000
Retained Earnings 610,000
Total Liabilities and Equities $1,590,000
Porter Company expects that Ellis will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."
Required:
A. Compute an estimation of goodwill based on the information above that Porter might be willing to pay (include in its purchase price), under each of the following additional assumptions:
(1) Porter is willing to pay for excess earnings for an expected life of 4 years (undiscounted).
(2) Porter is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last indefinitely, but Porter demands a higher rate of return of 20% because of the risk involved.
B. Determine the amount of goodwill to be recorded on the books if Porter pays $1,300,000 cash and assumes Ellis's liabilities.
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