Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 62

Goodwill effect on ROI Assume that fast-food restaurants generally provide an ROI of 15%, but that such a restaurant near a college campus has an ROI of 18% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant’s plant and equipment is $200,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 15% ROI.

Required:

a. Would you be willing to pay more than $200,000 for the restaurant near the campus? Explain your answer.

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b. If you purchased the restaurant near the campus for $240,000 and the fair value of the assets you acquired was $200,000, what balance sheet accounts would be used to record the cost of the restaurant?

Step 1 of 4

Goodwill effect-ROI

ROI :

Return on investment indicates the performance of the investment. It is very useful to compare different investments and select best investment on the basis of that comparison. The return on investment determines the benefit derived from the investment, that is, income or return up and above the original cost of the investment.

Goodwill :