The Islamic University of Gaza

Faculty of Commerce
Accounting Department

Advanced Accounting
Mid Term, First Semester 2014/2015

Time Allowed: One hour

Ramadan Al-Omari, FCCA

01 December 2014

Question No. 1
(15
marks)
Barcelona Ltd is considering the acquisition of Real Madrid Inc. on 1 January 2014. To assess
the amount it might be willing to pay, Barcelona Ltd makes the following computations and
assumptions.
Real Madrid Inc. has identifiable assets with a total fair value of $20,000,000 and liabilities of
$12,000,000. The assets include buildings with a fair value higher 20% than book value, Plant
and Machinery with a fair value 10% higher than book value, and land with a fair value 50%
higher than book value. The remaining lives of the assets are deemed to be approximately equal
to those used by Real Madrid Inc.
Real Madrid Inc.s pretax incomes for the years 2011, 2012, and 2013 were $1,400,000,
$1,510,000, and $1,600,000, respectively. Barcelona Ltd believes that an average of these
earnings represents a fair estimate of annual earnings for the indefinite future. The following are
included in pretax earnings:
Depreciation on Buildings (each year)
1,000,000
Depreciation on Plant and equipment (each year)
100,000
Extraordinary gain (2012)
200,000
Extraordinary loss (year 2013)
410,000
Other Operating Expenses (each year)
250,000
The normal rate of return on net assets is 15%.
Calculate a reasonable offering price for Real Madrid Inc., assuming that Barcelona Ltd
feels that it must earn a 25% return on its investment and that goodwill is determined by
capitalizing excess earnings.
Question No. 2
(15
marks)
On January 1, 2010, Manchester United Company acquired the net assets of Arsenal Ltd. for
$600,000 cash. The fair value of Arsenal Ltds identifiable net assets was $425,000 on this date.
Manchester United Company decided to measure goodwill impairment using the present value of
future cash flows to estimate the fair value of Arsenal Ltd. The information for the subsequent
years is as follows:
Year
2011
2012
2013

Present Value of Future

Cash Flows
500,000
440,000
550,000

Carrying Value of
Arsenals Net Assets*
430,000
400,000
420,000

Fair Value of
Arsenals Net Assets
400,000
400,000
550,000

*Excluding goodwill
For each year determine the amount of goodwill impairment, and prepare the journal
entry needed each year to record the goodwill impairment, if any.

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