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.
-Estimated goodwill by capitalizing average excess earnings at 14% is
A) $ 2,029,762.
B) $ 1,791,667.
C) $ 1,654,331.
D) $ 760,833.

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.
-Estimated goodwill by capitalizing average excess earnings at 14% is
A) $ 2,029,762.
B) $ 1,791,667.
C) $ 1,654,331.
D) $ 760,833.

Quizplus · Accepted Answer

To calculate the estimated goodwill by capitalizing average excess earnings at 14%, we need to determine the average net income (excluding the gain from the sale of discontinued operation) and then subtract the expected return on net assets for the industry (10%) from it to get the excess earnings. We will then divide the excess earnings by the capitalization rate (14%) to get the goodwill.

Average net income (2015-2019): ($710,000 + $680,000 + $980,000 + $745,000 + $815,000)/5 = $786,000
Excess earnings = $786,000 x (1-0.1) = $707,400
Goodwill = $707,400/0.14 = $1,791,667

Therefore, the answer is B, $1,791,667.

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

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