In: Accounting
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Normal earnings on the industry=Net assets*normal rate of return on net assets | |||||||||
Net assets=Fair value of assets-Fair value of liabilities=14,070,000-8,153,000=$ 5,917,000 | |||||||||
Normal earnings in the industry=5,917,000*15%=$ 887,550 | |||||||||
Adjusted earnings: | |||||||||
office equipment with a fair value approximating book value. Hence, depreciation will continue to be same for future years.No adjustment required for depreciation on equipmet | |||||||||
Sales commission will also be same for future years. Hence, no adjustment required. | |||||||||
buildings with a fair value 27% higher than book value.Hence, depreciation on building will have an effect on future earnings. | |||||||||
2012 | 2013 | 2014 | |||||||
Pre-tax income | 1255000 | 1603000 | 1001000 | ||||||
Add: Extra ordinary loss | 290000 | ||||||||
Less:Additional depreciation on building | |||||||||
(1055000*30%) | -316500 | -316500 | -316500 | ||||||
Adjusted earnings | 938500 | 1286500 | 974500 | ||||||
Excess earnings: | |||||||||
$ | |||||||||
Average of adjusted earnings | (938500+1286500+974500)/3 | 1066500 | |||||||
Less: Normal earnings in the industry | 887550 | ||||||||
Excess earnings | 178950 | ||||||||
Goodwill= Excess earnigs/Desired return on investment=178950/26%=$ 688269 | |||||||||
Reasonable offering price=Net assets+goodwill= 5,917,000+688269=$ 6605269 |