Goodwill arises when one firm acquires the net assets of another firm and pays m

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Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Target Co. had operating income of $60,900 and net assets with a fair value of $220,000. Takeover Co. pays $345,000 for Target Co.'s net assets and business activities.
Required: a. How much goodwill will result from this transaction?
b. Calculate the ROI for Target Co. based on its present operating income and the fair value of its net assets. (Round your percentage answer to 2 decimal places.)

c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be $60,900. (Round your percentage answer to 2 decimal places.)

d. Takeover Co. is willing to pay $125,000 more than fair value for the net assets acquired from Target Co. as it represents goodwill and the expected superior earnings in future years.
True or False Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Target Co. had operating income of $60,900 and net assets with a fair value of $220,000. Takeover Co. pays $345,000 for Target Co.'s net assets and business activities.
Required: a. How much goodwill will result from this transaction?
b. Calculate the ROI for Target Co. based on its present operating income and the fair value of its net assets. (Round your percentage answer to 2 decimal places.)

c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be $60,900. (Round your percentage answer to 2 decimal places.)

d. Takeover Co. is willing to pay $125,000 more than fair value for the net assets acquired from Target Co. as it represents goodwill and the expected superior earnings in future years.
True or False Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Target Co. had operating income of $60,900 and net assets with a fair value of $220,000. Takeover Co. pays $345,000 for Target Co.'s net assets and business activities.
Required: a. How much goodwill will result from this transaction?
b. Calculate the ROI for Target Co. based on its present operating income and the fair value of its net assets. (Round your percentage answer to 2 decimal places.)

c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be $60,900. (Round your percentage answer to 2 decimal places.)

d. Takeover Co. is willing to pay $125,000 more than fair value for the net assets acquired from Target Co. as it represents goodwill and the expected superior earnings in future years.
True or False

Explanation / Answer

(a) Fair value of net assets = $220,000

Amount paid by the Takeover company to aquire assets of the Target company = $345,000

Hence, value of goodwill = Amount paid by the aquiring company - Fair value of assets

= 345,000 - 220,000

= $125,000

(b) ROI of Target company = Operating income/Fair value of assets

= 60,900/220,000

= 27.68%

(c)

ROI of Takeover company = Operating income/Fair value of assets

= 60,900/345,000

= 17.65%

(d) Amount paid in excess of fair value of assets represents goodwill. Hence, $125,000 paid by the Takeover company in excess of fair value of assets of Target company, represents goodwill. Goodwill definitely helps in superior earnings in future years. Hence, the given statement is correct.

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