Exercise 1:
Goodwill- effect on ROI and operating income
Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair market value. Suppose that Target Co. had operating income of $90,000 and net assets with a fair market value of $300,000. Takeover Co. pays $450,000 for Target Co.'s net assets and business activities.
Required:
a. How much goodwill will result from the this transaction?
b. Calculate the ROI for Target Co. based on its present operating income and the fair market value of its net assets.
c. Calculate the ROI that the Takeover Co. will earn if the operating income and the acquired net assets continues to be $90,000.
d. What reasons can you think of to explain why Takeover Co. is willing to pay $150,000 more than the fair market value of the net assets acquired from Target Co.?
Exercise 2:
Determine depreciation method used and date of asset acquisition; record disposal of asset. The balance sheets of HiROE, Inc., showed the following at December 31, 2011, and 2010
December 31,2011 December 31,2010
Machine, less accumulated depreciation
of $283,500 at December31, 2011,
and $202,500 at December 31, 2010. $364,500 $445,500
Required:
a. If there have not been any purchase, sales or other transactions affecting this equipment account since the equipment was first acquired, what is the amount of the depreciation expense for 2011?
b. Assume the same facts as in part a, and assume that the estimated useful life of the equipment to HiORE, Inc. is eight years and that there is no estimated salvage value. Determine:
1. What the original cost of the equipment was.
2. What depreciation method is apparently being used. Explain your answer.
3. When the equipment was acquired.
c. Assume that this equipment account represents the cost of 10 identical machines. Calculate the gain or loss on the sale of one of the machines on January 2,2012, for $40,500. Use the horizontal model (or write the the journal entry) to show the effect of the sale of the machine.
Exercise 3:
Present value calculations - Using a present value table, your calculator, or a computer program present value function, answer the following questions:
e. Assume that a machine was purchased for $60,000. Cash of $20,000 was paid, and a four-year, 8% note payable was signed for the balance.
1. Use the horizontal model, or write the journal entry, to show the purchase of the machine as described.
2. How much is the equal annual payment of principal and interest du at the en of each year? Round your answer to the nearest $1.
3. What is the total of interest expense that will be reported over the life of the note? Round your answer to the nearest $1.
4. Use the horizontal model, or write the journal entries, to show the equal annual payments of principal and interest due at the end of each year.