Scribd
Upload
2K views1 page

Goodwill Estimation for Entity Acquisition

Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

Uploaded by

Jean Kathyrine Chiong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
2K views1 page

Goodwill Estimation for Entity Acquisition

Entity Y is considering acquiring Entity X. Entity X has average annual earnings of P1,000,000 over the past 5 years and net assets of P8,000,000. Using two different methods, the goodwill amounts are estimated. The first method capitalizes excess earnings above a 12% normal return on net assets at 25% and estimates goodwill at P160,000. The second method capitalizes all average earnings at the industry rate of 12% and estimates goodwill at P333,333.

Uploaded by

Jean Kathyrine Chiong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Discussion Problem no.

1 - (Estimating Goodwill - Direct Valuation)

Entity Y is contemplating on acquiring Entity X. Relevant information follows;

 Entity X's average annual earnings in the past 5 years were P1,000,000
 Entity X's net assets as at the current year-end have a fair value of P8,000,000
 The industry average rate of return equity is 12%
 The Probable duration on entity B's "Excess earnings" is 5 years.

Required:

1. Goodwill is equal to the average excess earnings capitalized at 25%. How much is the goodwill?

Average annual earnings P 1,000,000


Normal earnings on average net assets
(8,000,000 X 12%) (960,000)
Excess earnings P 40,000
Divide by: Capitalization rate 25%
Goodwill P 160,000

2. Goodwill is measured by capitalizing the average earnings at 12%. How much is the goodwill?

Average annual earnings P 1,000,000


Divide by: capitalization rate 12%
Estimated purchase price P 8,333,333
Fair value of net assets (8,000,000)
Goodwill P 333,333

You might also like