Use the following information for questions.
Jeremiah Inc. is being targeted for acquisition by Argo Corporation. As an analyst for Argo, you are asked to determine the goodwill that, pending various assumptions, may be inherent in this potential transaction.
The available information relating to Jeremiah includes the following:
Current net aszete:$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\$5.1$ millien
Expected return on net assets for industry:$\quad $$\quad $$\quad $$\quad $$10 \%$ Reported net income for the previous six consecutive years:
$\begin{array}{llll}
\text { YearAmount } &\text { Year }&\text { Amount } & \
2015 & \$ 710,000 & 2018 & \$ 745,000 \
2016 & \$ 680,000 & 2019 & \$ 815,000 \
2017 & \$ 980,000 & 2020 & \$ 835,000
\end{array}$ Net income for 2020 included a $ 200,000 gain from the sale of a discontinued operation.
-Assuming that excess earnings are expected to continue for 8 years, and ignoring the time value of money, estimated goodwill is
A) $ 2,273,000.
B) $ 2,006,667.
C) $ 1,854,333.
D) $ 1,531,733.

Question

Use the following information for questions.
Jeremiah Inc. is being targeted for acquisition by Argo Corporation. As an analyst for Argo, you are asked to determine the goodwill that, pending various assumptions, may be inherent in this potential transaction.
The available information relating to Jeremiah includes the following:
 Current net aszete:$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\$5.1$ millien
Expected return on net assets for industry:$\quad $$\quad $$\quad $$\quad $$10 \%$ Reported net income for the previous six consecutive years:
 $\begin{array}{llll}
\text { YearAmount } &\text { Year }&\text { Amount } & \
2015 & \$ 710,000 & 2018 & \$ 745,000 \
2016 & \$ 680,000 & 2019 & \$ 815,000 \
2017 & \$ 980,000 & 2020 & \$ 835,000
\end{array}$ Net income for 2020 included a $ 200,000 gain from the sale of a discontinued operation.
-Assuming that excess earnings are expected to continue for 8 years, and ignoring the time value of money, estimated goodwill is
A) $ 2,273,000.
B) $ 2,006,667.
C) $ 1,854,333.
D) $ 1,531,733.

Quizplus · Accepted Answer

1. Calculate average net income for past six years: 
[(710,000+680,000+980,000+(745,000-200,000)+(815,000)+(835,000)]/6= 808,333
2. Calculate expected return on net assets = 10% x 5,100,000 = 510,000
3. Calculate excess earnings = 808,333 - 510,000 = 298,333
4. Calculate total excess earnings over eight years = 298,333 x 8 = 2,386,667
5. Calculate estimated goodwill = 2,386,667 x 0.84 = 2,006,667 (using a discount rate of 16% (100% - 10%))
Therefore, the best choice is B.

Use the Following Information for Questions \quad \quad \quad

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