Eden Company Is Trying to Decide Whether to Acquire Bloomington

Essay

Eden Company is trying to decide whether to acquire Bloomington Inc. The following balance sheet for Bloomington Inc. provides information about book values. Estimated market values are also listed, based upon Eden Company's appraisals. Eden Company expects that Bloomington will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."
Required:
A. Compute an estimation of goodwill based on the information above that Eden might be willing to pay (include in its purchase price), under each of the following additional assumptions:
(1) Eden is willing to pay for excess earnings for an expected life of 4 years (undiscounted).
(2) Eden is willing to pay for excess earnings for an expected life of 4 years, which should be
capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last indefinitely, but Eden demands a higher rate of return of
20% because of the risk involved.
B. Determine the amount of goodwill to be recorded on the books if Eden pays $1,300,000 cash and assumes Bloomington's liabilities.