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    Chapter 23-14

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    Janna rae Biongan
    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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    Chapter 23-14

    Uploaded by

    Janna rae Biongan
    76 views3 pages
    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.

    Original Description:

    Intangible Assets

    Original Title

    CHAPTER 23-14

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    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.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    76 views3 pages

    Chapter 23-14

    Uploaded by

    Janna rae Biongan
    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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    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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