Goodwill arises when one firm acquires the net assets of another firm and pays m
ID: 2426387 • Letter: G
Question
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 Got Em Co. had operating income of $56,000 and net assets with a fair market value of $163,000. Want Them Co. pays $283,000 for Got Em Co.'s net assets and business activities.
How much goodwill will result from this transaction?
Calculate the ROI for Got Em Co. based on its present operating income and the fair market value of its net assets. (Round your answer to 2 decimal places.)
Calculate the ROI that Want Them Co. will earn if the operating income of the acquired net assets continues to be $56,000. (Round your answer to 2 decimal places.)
Want Them Co. is willing to pay $120,000 more than fair market value for the net assets acquired from Got Em Co. as it represents goodwill and the expected superior earnings in future years.
Required: a.How much goodwill will result from this transaction?
Explanation / Answer
a Purchase Consideration 283000 fair market value of net Asset 163000 Good will 120000 b ROI for Got Em Co fair market value of net Asset 163000 Operating income 56000 ROI =56000/163000 34.36% c ROI that Want Them Co Purchase Consideration 283000 Operating income 56000 ROI =56000/283000 19.79% d TRUE
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