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    PROBLEM 1. (Estimating Goodwill - Direct Valuation) Required

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    Jean Kathyrine Chiong
    1. Goodwill is calculated as the average excess earnings of $40,000 capitalized at 25%, resulting in goodwill of $160,000. 2. Goodwill is calculated by capitalizing the average earnings of $1,000,000 at 12%, resulting in an estimated purchase price of $8,333,333 and goodwill of $333,333. 3. Goodwill is calculated as the average excess earnings of $40,000 multiplied by the probable duration of excess earnings of 5 years, resulting in goodwill of $200,000.

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    PROBLEM 1. (Estimating Goodwill - Direct Valuation) Required

    Uploaded by

    Jean Kathyrine Chiong
    25 views2 pages
    1. Goodwill is calculated as the average excess earnings of $40,000 capitalized at 25%, resulting in goodwill of $160,000. 2. Goodwill is calculated by capitalizing the average earnings of $1,000,000 at 12%, resulting in an estimated purchase price of $8,333,333 and goodwill of $333,333. 3. Goodwill is calculated as the average excess earnings of $40,000 multiplied by the probable duration of excess earnings of 5 years, resulting in goodwill of $200,000.

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    PROBLEM 1

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    1. Goodwill is calculated as the average excess earnings of $40,000 capitalized at 25%, resulting in goodwill of $160,000. 2. Goodwill is calculated by capitalizing the average earnings of $1,000,000 at 12%, resulting in an estimated purchase price of $8,333,333 and goodwill of $333,333. 3. Goodwill is calculated as the average excess earnings of $40,000 multiplied by the probable duration of excess earnings of 5 years, resulting in goodwill of $200,000.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Download as docx, pdf, or txt
    25 views2 pages

    PROBLEM 1. (Estimating Goodwill - Direct Valuation) Required

    Uploaded by

    Jean Kathyrine Chiong
    1. Goodwill is calculated as the average excess earnings of $40,000 capitalized at 25%, resulting in goodwill of $160,000. 2. Goodwill is calculated by capitalizing the average earnings of $1,000,000 at 12%, resulting in an estimated purchase price of $8,333,333 and goodwill of $333,333. 3. Goodwill is calculated as the average excess earnings of $40,000 multiplied by the probable duration of excess earnings of 5 years, resulting in goodwill of $200,000.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
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    PROBLEM 1.

    (Estimating Goodwill – Direct Valuation)

    Required:
    1. Goodwill is equal to the average excess earnings capitalized at 25%. How much is
    the
    goodwill?

    Average annual earnings 1,000,000


    Normal earnings (8M x 12%) (960,000)
    Excess earnings 40,000
    Divide by: Capitalization rate 25%
    Goodwill 160,000

    2. Goodwill is measured by capitalizing the average earnings at 12%. How much is


    the Goodwill
    Average earnings 1,000,000
    Divide by: Capitalization rate 12%
    Estimated purchase price 8,333,333
    Fair value of Entity B’s net assets (8,000,000)
    Goodwill 333,333
    3. Goodwill is measured at the undiscounted amount of total excess earnings
    expected to
    be earned from the combination. How much is goodwill?

    Average annual earnings 1,000,000


    Normal earnings (8M x 12%) (960,000)
    Excess earnings 40,000
    Multiply by: Probable duration 5
    Goodwill 200,000

    4. Goodwill is measure by discounting the average excess earnings at 9%. How much
    is the goodwill?

    Average annual earnings 1,000,000


    Normal earnings (8M x 12%) (960,000)
    Excess earnings 40,000
    Multiply by: PV of ordinary annuity of 1 at 9% 3.88965
    Goodwill 155,586

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