Lion Company is considering the acquisition of Tiger Company, Inc. early in 2018. To assess the amount it might be willing to pay, Lion Company makes the following computations and assumptions. Tiger Company incomes in the year of 2014 to 2017 were OMR 180,000, OMR 180,000, OMR 200,000, OMR 250,000 and total income of the year’s OMR 810,000 respectively. Lion Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. Depreciation on Office buildings and Plant and equipment each year OMR 350,000 and 150,000. Extraordinary gain of the Company in the year of 2016 OMR 100,000 and Extraordinary loss of the Company in the year of 2018 OMR 350,000. Lion Company has identifiable assets with a total fair value of OMR 25,000,000 and Creditors OMR 700,000 and Account payable OMR 200,000. The assets include office equipment with a fair value approximating book value, office building with a fair value 25% higher than book value and Vehicle with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Lion Company. Required: The normal rate of return on the net assets is 20%. The company earns 25% return on its investment. Fair value of return on investment 30%. Calculate estimated goodwill.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Lion Company is considering the acquisition of Tiger Company, Inc. early in 2018. To assess the amount it might be willing to pay, Lion Company makes the following computations and assumptions.

Tiger Company incomes in the year of 2014 to 2017 were OMR 180,000, OMR 180,000, OMR 200,000, OMR 250,000 and total income of the year’s OMR 810,000 respectively. Lion Company believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. Depreciation on Office buildings and Plant and equipment each year OMR 350,000 and 150,000. Extraordinary gain of the Company in the year of 2016 OMR 100,000 and Extraordinary loss of the Company in the year of 2018 OMR 350,000.
Lion Company has identifiable assets with a total fair value of OMR 25,000,000 and Creditors OMR 700,000 and Account payable OMR 200,000. The assets include office equipment with a fair value approximating book value, office building with a fair value 25% higher than book value and Vehicle with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Lion Company.

Required:

The normal rate of return on the net assets is 20%. The company earns 25% return on its investment. Fair value of return on investment 30%. Calculate estimated goodwill.

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