Problem 1: MINE COMPANY

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 450,000

Required: Compute the goodwill under the following methods:

a. Average future earnings are capitalized at 8%.
Net assets including goodwill (450,000 / 8%) 5,625,000
Less: Net assets excluding goodwill 5,000,000
Goodwill 625,000

b. Goodwill is measured at the average excess earnings capitalized at 10% with

normal rate at 8%.
Average earnings 450,000
Less: Normal earnings (8% x 5,000,000) -400,000
Average excess earnings 50,000
Capitalized at 10%
Goodwill 500,000

c.
Goodwill is measured at the present value of the average excess earnings
discounted at 10% for four years with normal rate at 8%. The present value
of an ordinary annuity of 1 to 4 years at 10% is 3.17.
Goodwill (50,000 x 3.17) 158,500
Problem 2: BUNNY COMPANY
Required:
1. Determine the goodwill arising from the acquisition.
Land 3,500,000
Machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Trademark 1,000,000
Patent 500,000
Accounts payable -3,000,000
Net assets required 6,500,000

Acquisition cost 9,000,000

Net assets acquired -6,500,000
Goodwill 2,500,000

2. Prepare journal entry to record the acquisition.

Land 3,500,000
Machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Trademark 1,000,000
Patent 500,000
Goodwill 25,000,000
Accounts payable 3,000,000
Cash 9,000,000