Lin’s Auto Repair Service has been in business for five years. He has developed

Question

Lin’s Auto Repair Service has been in business for five years. He has developed a great reputation of doing a good job at reasonable prices. His reputation has given him a large, loyal clientele. During those years, Mr. Lin has purchased net assets of $150,000 on which he owes $50,000. Lin has decided to sell his business and open another one 10 miles away. Hector Lopez has agreed to purchase the business for $200,000. Is it ethical for Mr. Lin to accept a larger amount for this business than its value? If so, how would Mr. Lopez record this transaction? Is it ethical for Mr. Lin to open a new business so close to the old business?

Explanation / Answer

Is it ethical for Mr. Lin to accept a larger amount for this business than its value?

Yes, it is ethical for Mr. Lin to accept a larger amount than the net asset value, as the extra amount is the price for the reputation of his business which, he has built over the years.

If so, how would Mr. Lopez record this transactiion?

Mr.Lopez would pass a journal entry as below:

Assets (as listed in Mr.Lins's books) Debit $150,000

Goodwill $100,000

Liabilities (as listed in Mr.Lins books) Credit $50,000

Cash [Credit] $200,000

Is it ethical for Mr. Lin to open a new business so close to the old business?

He is opening a new business in the same line 10 miles away. Whether it is ethical or not depends on whether he would use the same firm or trade name and whether he would be able to wean away his old customers form Mr. Lopez. If the new business would have any such effect, then it is unethical.

The 10 miles distance between the locations may be a factor in that Mr. Lin might be able to attract his old customers. If so, it is unethical to open a new business in the same line so near.

However, the matter would depend on what Mr.Lopez feels about the matter? If it is objectionable to him, Mr. Lin should not open a business in the same line and so near.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.