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    Discussion Problem No. 1 - (Estimating Goodwill - Direct Valuation)

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    Jean Kathyrine Chiong
    Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

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    Discussion Problem No. 1 - (Estimating Goodwill - Direct Valuation)

    Uploaded by

    Jean Kathyrine Chiong
    2K views1 page
    Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

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    Discussion Problem no

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    Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views1 page

    Discussion Problem No. 1 - (Estimating Goodwill - Direct Valuation)

    Uploaded by

    Jean Kathyrine Chiong
    Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Discussion Problem no.

    1 - (Estimating Goodwill - Direct Valuation)

    Entity Y is contemplating on acquiring Entity X. Relevant information follows;

     Entity X's average annual earnings in the past 5 years were P1,000,000
     Entity X's net assets as at the current year-end have a fair value of P8,000,000
     The industry average rate of return equity is 12%
     The Probable duration on entity B's "Excess earnings" is 5 years.

    Required:

    1. Goodwill is equal to the average excess earnings capitalized at 25%. How much is the goodwill?

    Average annual earnings P 1,000,000


    Normal earnings on average net assets
    (8,000,000 X 12%) (960,000)
    Excess earnings P 40,000
    Divide by: Capitalization rate 25%
    Goodwill P 160,000

    2. Goodwill is measured by capitalizing the average earnings at 12%. How much is the goodwill?

    Average annual earnings P 1,000,000


    Divide by: capitalization rate 12%
    Estimated purchase price P 8,333,333
    Fair value of net assets (8,000,000)
    Goodwill P 333,333

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