Question

1. Lion Company is considering the acquisition of Tiger Company, Inc. early in 2018. To assess the amount it might be willing to pay, Lion Company makes the following computations and assumptions.

1. Tiger Company incomes in the year of 2014 to 2017 were OMR 180,000, OMR 180,000, OMR 200,000, OMR 250,000 and total income of the year’s OMR 810,000 respectively. Lion Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. Depreciation on Office buildings and Plant and equipment each year OMR 350,000 and 150,000. Extraordinary gain of the Company in the year of 2016 OMR 100,000 and Extraordinary loss of the Company in the year of 2018 OMR 350,000.
2. Lion Company has identifiable assets with a total fair value of OMR 25,000,000 and Creditors OMR 700,000 and Account payable OMR 200,000. The assets include office equipment with a fair value approximating book value, office building with a fair value 25% higher than book value and Vehicle 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 Lion Company.

Required:

The normal rate of return on the net assets is 20%. The company earns 25% return on its investment. Fair value of return on investment 30%. Calculate estimated goodwill.

2. Putin Company acquired the assets and assumed the liabilities of Joni Company on January 1, 2018, paying OMR 4,500,000 cash. Immediately prior to the acquisition, Joni Company's balance sheet was as follows:

                                                BOOK VALUE FAIR VALUE

            Accounts receivable                        240,000              220,000

            Inventory                                        290,000              320,000

            Land                                                960,000           1,508,000

            Buildings                                      1,020,000         1,392,000

                  Total                                       2,510,000           3,440,000

            Accounts payable                           270,000            270,000

            Note payable                                   600,000              600,000

            Common stock, $5 par                    420,000

            Other contributed capital                640,000

            Retained earnings                           580,000

                  Total                                       2,510,000

Required:

1. Prepare the journal entries on the books of Putin Company to record the purchase the assets and assumption of the liabilities of Joni Company assuming that the amount paid was OMR 900,000.
2. Repeat the requirement in (A) assuming that the amount paid was OMR 400,000 except cash.

Answer 1

1. weighted average Profit
year	2014	2015	2016	2017	2018
profit	180000	180000	200000	250000	810000
depreciation on office building					-350000
depreciation on equipments					-150000
extraordinary gain			-100000
extra ordinary loss					350000
profit	180000	180000	100000	250000	660000
weight	1	2	3	4	5
weighted profit	180000	360000	300000	1000000	3300000
Total weighted profit	5140000
weight	15
weighted average profit	342666.67

2. capital employeed
Assets realised	25000000
liabilities:-
creditors	-700000
Accounts payable	-200000
Closing Capital Employeed	25900000
(Note:- Closing Capital employeed = Assets Realised- liabilities repaid)
3. Expected Return	Closing Capital Employeed * Expected Rate of return
Expected Return=	5180000
4. Super Profit=	Weighted Average Profit- Expected Return
	-4837333
5. Goodwill=	Super Profit * 3 years
Goodwill=	-14152000

conclusion- As goodwill is negative of this company, Lion company should not acquire tiger as it has negative goodwill.