Estimate goodwill, record acquisition. Caswell Company is contemplating the purchase of LaBelle Company as of January 1, 2016. LaBelle Company has provided the following current balance sheet:
The following information exists relative to balance sheet accounts:
a. The inventory has a fair value of $200,000.
b. The land is appraised at $100,000 and the building at $600,000.
c. The 9% bonds payable have five years to maturity and pay annual interest each December 31. The current interest rate for similar bonds is 8% per year.
d. It is likely that there will be a payment for goodwill based on projected income in excess of the industry average, which is 10% on total assets. Caswell will project the average past five years’ operating income and will pay for excess income based on an assumption of a 5-year life and a risk rate of return of 16%. The past five years’ net incomes for LaBelle are as follows:
1. Provide an estimate of fair value for the bonds and for goodwill.
2. Using the values derived in part (1), record the acquisition on the Caswell books.