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 assets: $5.1 million.
Expected return on net asset for industry: 10%
Reported net income for the previous six consecutive years:

The earnings for 2007 included a $200,000 gain from the sale of a discontinued part of its business.
-Estimated goodwill by capitalizing average excess earnings at 14% is
A)$1,791,667
B)$760,833
C)$2,029,762
D)$1,654,331

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 assets: $5.1 million.
Expected return on net asset for industry: 10%
Reported net income for the previous six consecutive years:
  
The earnings for 2007 included a $200,000 gain from the sale of a discontinued part of its business.
-Estimated goodwill by capitalizing average excess earnings at 14% is
A)$1,791,667 
B)$760,833 
C)$2,029,762 
D)$1,654,331

Quizplus · Accepted Answer

To estimate goodwill by capitalizing average excess earnings at 14%, you divide the excess earnings by the capitalization rate (0.14). The correct calculation results in $1,791,667.

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