Use the following information for questions
Jessup Corp.will acquire a controlling stake in the outstanding shares of Parasol Inc.for
$9.2 million in cash.
-Parasol's average annual net income is $75,000 above the average for Parasol's industry. Assuming Jessup estimates goodwill by capitalizing excess earnings at 14%, the estimate of goodwill is
A)nil
B)$1,050,000
C)$535,714
D)$954,333

Question

Use the following information for questions 
Jessup Corp.will acquire a controlling stake in the outstanding shares of Parasol Inc.for
$9.2 million in cash.
-Parasol's average annual net income is $75,000 above the average for Parasol's industry. Assuming Jessup estimates goodwill by capitalizing excess earnings at 14%, the estimate of goodwill is
A)nil
B)$1,050,000
C)$535,714
D)$954,333

Quizplus · Accepted Answer

The calculation for goodwill is as follows: 
Excess Earnings = Parasol's average annual net income - Industry average annual net income 
Excess Earnings = $75,000 
Goodwill = Excess Earnings / Capitalization Rate 
Goodwill = $75,000 / 0.14 
Goodwill = $535,714. Therefore, the best choice is C.

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