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Chapter 23-14

This document provides information about computing goodwill and purchase price for the acquisition of Cocoy Company. It gives financial information for Cocoy Company and notes that some assets were understated. Total earnings over 4 years were provided. It then asks to compute goodwill and purchase price assuming different methods: 1) purchasing goodwill for 4 years, 2) capitalizing average excess earnings using 10%, 3) capitalizing average earnings using 8%, and 4) discounting average excess earnings using 12%. The solutions show the calculations for each method and identify the matching answers.

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Janna rae Biongan
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538 views3 pages

Chapter 23-14

This document provides information about computing goodwill and purchase price for the acquisition of Cocoy Company. It gives financial information for Cocoy Company and notes that some assets were understated. Total earnings over 4 years were provided. It then asks to compute goodwill and purchase price assuming different methods: 1) purchasing goodwill for 4 years, 2) capitalizing average excess earnings using 10%, 3) capitalizing average earnings using 8%, and 4) discounting average excess earnings using 12%. The solutions show the calculations for each method and identify the matching answers.

Uploaded by

Janna rae Biongan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 23: INTANGIBLE ASSETS

PROBLEM 23-14

Goodwill Computation Cocoy Company engaged your services to compute the goodwill and purchase
price for the acquisition of Cocoy Company. The following data are available for the Cocoy Company:

Current Assets P6,000,000 Current Liabilities P3,500,000


Investments 2,500,000 Noncurrent Liabilities 2,500,000
PPE 13,000,000 Ordinary Shares 7,000,000
Share Premium 1,500,000
Accumulated Profits 7,000,000
Total Assets P21,500,000 Total Liabilities and SHE P21,500,000

You found out that the investments have a fair value of P2,000,000 and the current assets and
property, plant and equipment are understated by P800,000 and P1,850,000. All other assets and
equities are properly stated. An examination of the company's income for the last 4 years revealed
that the total earnings amounted to P9,000,000. The said earnings include gain on sale during the last
year of P100,000 and P150,000, annual bonus of the president. The normal rate of return is 10%.

QUESTIONS:

Compute for the goodwill and the corresponding purchase price assuming:
1. Purchase of goodwill for 4 years

Purchase Purchase
Goodwill Price Goodwill Price
a. P 2,400,000 P 20,900,000 c. P 12,037,500 P 29,687,500
b. P 6,100,000 P 23,750,000 d. P 1,852,753 P 19,502,753

2. Capitalization of average excess earnings using 10%

Purchase Purchase
Goodwill Price Goodwill Price
a. P 2,400,000 P 20,900,000 c. P 12,037,500 P 29,687,500
b. P 6,100,000 P 23,750,000 d. P 1,852,753 P 19,502,753

3. Capitalization of average earnings using 8%

Purchase Purchase
Goodwill Price Goodwill Price
a. P 2,400,000 P 20,900,000 c. P 6,100,000 P 23,750,000
b. P 12,037,500 P 29,687,500 d. P 1,852,753 P 19,502,753

4. Discounted average excess earnings using 12% rate

Purchase Purchase
Goodwill Price Goodwill Price
a. P 2,400,000 P 20,900,000 c. P 1,852,753 P 19,502,753
b. P 6,100,000 P 23,750,000 d. P 12,037,500 P 29,687,500
SOLUTIONS:

Current Assets (6,000,000+800,000) P 6,800,000


Investments 2,000,000
PPE (13,000,000+1,850,000) 14,850,000
Current Liabilities (3,500,000)
Noncurrent Liabilities (2,500,000)
Fair value of net asset acquired P 17,650,000

Fair value of net asset acquired P 17,650,000


Multiply by: Normal rate of return 10%
Normal Earnings P 1,765,000

Total Earnings P 9,000,000


Loss on sale or (Gain) on sale (100,000)
Bonus (150,000*4 years) 600,000
Operating Income P 9,500,000
Divided by: Number of years 4
Average Earnings P 2,375,000

Solution 1: (Answer: A)
Average Earnings P 2,375,000
Less: Normal Earning 1,765,000
Average Excess Earnings 610,000
Multiply by: Capitalization Period 4
Goodwill P 2,440,000

Goodwill P 2,440,000
Add: Fair value of net asset acquired 17,650,000
Purchase Price P20,090,000

Solution 2: (Answer:B)
Average Earnings P 2,375,000
Less: Normal Earning 1,765,000
Average Excess Earnings 610,000
Divide by: Capitalization Rate 10%
Goodwill P 6,100,000

Goodwill P 6,100,000
Add: Fair value of net asset acquired 17,650,000
Purchase Price P23,750,000

Solution 3: (Answer: B)
Average Earnings P 2,375,000
Divide by: Capitalization Rate 8%
Purchase Price P29,687,500

Purchase Price P29,687,500


Less: Fair value of net asset acquired 17,650,000
Goodwill P12,037,500
Solution 4:
Average Earnings P 2,375,000
Less: Normal Earning 1,765,000
Average Excess Earnings 610,000
Multiply by: Present Value of Ordinary
Annuity 3.0373
Goodwill P 1,852,753

Goodwill P 1,852,753
Add: Fair value of net asset acquired 17,650,000
Purchase Price P19,502,753

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