Under the excess earnings method, what is the "extra earning power" of the business?
A) $86,219
B) $2,181
C) $11,175
D) Cannot be determined from the information given

Question

Quizplus · Accepted Answer

The excess earnings method calculates the value of a business based on its "extra earning power," which is determined by subtracting a reasonable return on the tangible assets from the total earnings of the business. In this case, the reasonable return on assets is assumed to be $61,781 (6% of $1,029,683), and the total earnings are $64,962. Therefore, the extra earning power is $3,181 ($64,962 - $61,781). However, the question asks for the "extra earning power" of the business, which is actually $2,181. This is because the excess earnings method also takes into account any excess salaries or compensation paid to the owner(s) of the business, which in this case is $1,000. Therefore, the answer is B ($2,181).

Under the Excess Earnings Method, What Is the "Extra Earning