1) Baker Company is considering the acquisition of Charley, Inc. To assess the amount it may be willing to pay, Baker makes the subsequent computations and assumptions.
A) Charley, Inc. has identifiable assets with a total fair value of $ 8,000,000 and liabilities of $ 4,500,000. The assets add office equipment with a fair value approximating book value, buildings with a fair value 30 percent higher than book value, and land with a fair value 40 percent higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Charley, Inc.
B) Charley, Inc.'s pretax incomes for the years 2009 through 2011 were $ 550,000, $ 640,000, and $ 450,000, respectively. Perkins believes that an average of these earnings shows a fair estimate of annual earnings for the indefinite future. Thus, it may need to consider adjustments for the subsequent items included in pretax earnings: Depreciation on Buildings (each year) 270,000, Depreciation on Equipment (each year) 40,000, Extraordinary Loss (year 2011) 150,000, Salary Expense (each year) 180,000.
C) The normal rate of return on net assets for the industry is 16 percent. Required:
A) Suppose that Baker feels that it must earn 15% return on its investment, and that goodwill is evaluate by capitalizing excess earnings. Based on these assumptions, determine a reasonable offering price for Charley, Inc. show how much of the price consists of goodwill.
B) Consider that Baker feels that it must earn a 20% return on its investment, but that average excess earnings are to be capitalized for four years only. Based on these assumptions, determine a reasonable offering price for Charley, Inc. show how much of the price consists of goodwill.
2) Balance sheet information for Sizemic Corporation at 1st January, 2011, is summarized as given: existing assets 830,000, Plant assets 1,900,000, liabilities 1,300,000, capital stock $ 10 par 900,000, Retained earnings 530,000. Sizemic's assets and liabilities are fairly valued except for plant assets that are undervalued by $ 300,000. On 2nd January, 2011, Partner Corporation issues 70,000 shares of its $ 10 par value common stock for all of Sizemic's net assets and Sizemic is dissolved. Market quotations for the two stocks on this date are:
Partner common: $ 30,
Sizemic common: $ 20.
Pell pays the followings fees and costs in connection with the combinations:
Finder's fee $ 15,000, Costs of issuing and registering stock 6,000, Accounting and Legal fees 4,000.
Required:
Purpose the journal entry on Partner's books for the acquisition of Sizemic Corporation's net assets.