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Lopez Company is contemplating the acquisition of Scott Company
Lopez Company is contemplating the acquisition of Scott Company. Lopez determines that the fair market value of Scott's identifiable net assets (total assets less total liabilities) is $6,528,300.
For this specific industry, 8% is considered a normal rate of return on net assets. Scott's earnings for the past few years have averaged $694,200.
Required:
Estimate goodwill for this transaction using the capitalization of excess earnings method.
Expert Solution
Computation of Goodwill under the capitalization of excess earnings method:
Earnings attributable to Net assets = Identifiable net assets * Normal rate of return
= $6,528,300 *8%
Earnings attributable to Net assets =$522,264
Excess of Actual earnings over the earnings attributable to net assets = $694,200-$522,264 = $171,936
Let's assume a Capitalization rate of 8%
Capitalization of Excess Earnings =Excess of Actual earnings over the earnings attributable to net assets/Capitalization rate
= $171,936/8%
= $2,149,200
So, Goodwill under the capitalization of excess earnings method is $2,149,200.
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