Estimate goodwill, record purchase. Caswell Company is contemplating the purchase of LaBelle Company as of January 1, 20X6. LaBelle Company has provided the following current balance sheet:
|
Assets |
Liabilities and Equity |
||
|
Cash and receivables |
$150,000 |
Current liabilities |
$120,000 |
|
Inventory |
180,000 |
9% bonds payable |
300,000 |
|
Land |
50,000 |
Common stock ($5 par) |
100,000 |
|
Building |
600,000 |
Paid in capital in excess of par |
200,000 |
|
Accumulated depreciation |
150,000 |
Retained earnings |
150,000 |
|
Goodwill |
40,000 |
||
|
Total assets |
$870,000 |
Total liabilities and equity |
$870,000 |
The following information exists relative to balance sheet accounts:
a. The inventory has a fair value of $200,000.
b. The land is appraised at $100,000 and the building at $600,000.
c. The 9% bonds payable have five years to maturity and pay annual interest each December 31. The current interest rate for similar bonds is 8% per year.
d. It is likely that there will be a payment for goodwill based on projected income in excess of the industry average, which is 10% on total assets. Caswell will project the average past five years’ operating income and will pay for excess income based on an assumption of a 5 year life and a risk rate of return of 16%. The past five years’ net incomes for LaBelle are as follows:
|
20X1 |
$120,000 |
|
20X2 |
140,000 |
|
20X3 |
150,000 |
|
20X4 |
200,000 |
|
20X5 |
180,000 |
Required
1. Provide an estimate of fair value for the bonds and for goodwill.
2. Using the values derived in Requirement 1, record the purchase on the Caswell books.