The president of Plain Corp., Joyce Lima, is thinking of purchasing Blue Spruce Corporation. She thinks that the offer sounds fair but she wants to consult a professional accountant to be sure. Blue Spruce is asking for $78,150 in excess of the fair value of the identifiable net assets. Blue Spruce's net income figures for the past five years are as follows: 2019-$64,270 2020-$52,000 2021-$88,430 2022-$83,410 2023-$71,280 The company's identifiable net assets were appraised at $437,900 on December 31, 2023. You have done some initial research on the balloon industry and discovered that the normal rate of return on identifiable net assets is 15%. After analyzing such variables as the stability of past earnings, the nature of the business, and general economic conditions, you have decided that the average excess earnings for the past five years should be capitalized at 20% and that the excess earnings will continue for about six more years. Further research led you to discover that the Happy Balloon Corporation, a competitor of similar size and profitability, was recently sold for $493,400, five times its average yearly earnings of $98,680.

The president of Plain Corp., Joyce Lima, is thinking of purchasing Blue Spruce Corporation. She thinks that the offer sounds fair but she wants to consult a professional accountant to be sure. Blue Spruce is asking for $78,150 in excess of the fair value of the identifiable net assets. Blue Spruce's net income figures for the past five years are as follows: 2019-$64,270 2020-$52,000 2021-$88,430 2022-$83,410 2023-$71,280 The company's identifiable net assets were appraised at $437,900 on December 31, 2023. You have done some initial research on the balloon industry and discovered that the normal rate of return on identifiable net assets is 15%. After analyzing such variables as the stability of past earnings, the nature of the business, and general economic conditions, you have decided that the average excess earnings for the past five years should be capitalized at 20% and that the excess earnings will continue for about six more years. Further research led you to discover that the Happy Balloon Corporation, a competitor of similar size and profitability, was recently sold for $493,400, five times its average yearly earnings of $98,680.

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter12: Corporations: Organization, Capital Structure, And Operating Rules

Section: Chapter Questions

Problem 27P

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