The owners of Dallas' Electronics Store are contemplating selling the business to new interests.The cumulative earnings for the past 5 years amounted to $900,000 including extraordinary gains of $30,000.The annual earnings based on an average rate of return on investment for this industry would have been $138,000.If excess earnings are to be capitalized at 15%, then implied goodwill should be
A)$210,000.
B)$280,000.
C)$240,000.
D)$870,000.

Question

Quizplus · Accepted Answer

The excess earnings are calculated by subtracting the average industry earnings ($138,000) from the average annual earnings of the store ($174,000, which is $900,000/5). The excess earnings are $36,000 ($174,000 - $138,000). Capitalizing these excess earnings at 15% gives the implied goodwill: $36,000 / 0.15 = $240,000.

The Owners of Dallas' Electronics Store Are Contemplating Selling the Business