Reck Company is considering the acquisition of Clock Inc. To assess the amount it might be willing to pay, Reck makes the following computations and assumptions. A. Clock, Inc. has identifiable assets with a total fair value of OMR 9,000,000 and liabilities of OMR 6,500,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 30% higher than book value, and land 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 Clock Inc. B. Clock Inc.'s pretax incomes for the years 2018 through 2020 were OMR 580,000, OMR 420,000, and OMR 350,000, respectively. Reck believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings: Depreciation on Buildings (each year) 380,000 Depreciation on Equipment (each year) 30,000 Extraordinary Loss (each year) 130,000 Salary Expense (each year) 170,000 C. The normal rate of return on net assets for the industry is 12%. Required: Assume that Reck feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Clock Inc. Indicate how much of the price consists of goodwill.
Reck Company is considering the acquisition of Clock Inc. To assess the amount it might be willing to pay, Reck makes the following computations and assumptions.
A. Clock, Inc. has identifiable assets with a total fair value of OMR 9,000,000 and liabilities of OMR 6,500,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 30% higher than book value, and land 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 Clock Inc.
B. Clock Inc.'s pretax incomes for the years 2018 through 2020 were OMR 580,000, OMR 420,000, and OMR 350,000, respectively. Reck believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:
Depreciation on Buildings (each year) 380,000
Depreciation on Equipment (each year) 30,000
Extraordinary Loss (each year) 130,000
Salary Expense (each year) 170,000
C. The normal rate of return on net assets for the industry is 12%.
Required:
Assume that Reck feels that it must earn a 20% return on its investment, and that
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