PROFE03 ACCOUNTING FOR BUSINESS COMBINATIONS

ACTIVITY CHAPTER 3

Solutions:

Method #1: Multiples of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Multiply by: PV of an ordinary annuity @10%, n=5 5
Goodwill 1,000,000

Method #2: Capitalization of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Divide by: Capitalization rate 25%
Goodwill 800,000

Method #3: Capitalization of average earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Divide by: Capitalization rate 12.5%
Estimated purchase price 20,800,000
Fair value of acquiree’s net assets (20,000,000)
Goodwill 800,000

Method #4: Present value of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)
Excess earnings 200,000
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 758,158