Icicle Corp.'s average annual net income is $ 50,000 above the average for Icicle's industry. Snowy is interested in purchasing Icicle. Assuming Snowy estimates goodwill by capitalizing excess earnings at 13%, the estimated goodwill (to the nearest dollar) is
A) $ 753,846.
B) $ 685,162.
C) $ 384,615.
D) $ 0.

Question

Quizplus · Accepted Answer

Goodwill is calculated by capitalizing the excess earnings. Excess earnings are $50,000, and the capitalization rate is 13%. The formula is: Goodwill = Excess Earnings / Capitalization Rate = $50,000 / 0.13 = $384,615.