Question

Kivi Service Stations is considering expanding its operations to include the greater Dubuque area. Rather than build new service stations in the Dubuque area, management plans to acquire existing service stations and convert them into Kivi outlets. Kivi is evaluating two similar acquisition opportunities. Information relating to each of these service stations is presented as follows. Joe’s Garage Gas N’ Go Estimated normal rate of return on net assets 20 % 20 % Fair value of net identifiable assets $ 950,000 $ 980,000 Actual average net income for past five years 220,000 275,000 Required: a. Compute an estimated fair value for any goodwill associated with Kivi purchasing Joe’s Garage. Base your computation upon an assumption that successful service stations typically sell at about 9.25 times their annual earnings. b. Compute an estimated fair value for any goodwill associated with Kivi purchasing Gas N’ Go. Base your computation upon an assumption that Kivi’s management expects excess earnings to continue for four years.

Answer 1

Answer:

A. $1,085,000

B. $316,000

Explanation:

A. Computation of an estimated fair value for any goodwill associated with Kivi purchasing Joe’s Garage

Actual average net income per year $220,000

Sales multiplier 9.25 times

Estimated fair market value of Joe's Garage$2,035,000

($220,000*9.45 Times)

Fair market value of identifiable assets($950,000)

Estimated goodwill of Joe's Garage$1,085,000

($2,035,000-$950,000)

b. Computation for an estimated fair value for any goodwill associated with Kivi purchasing Gas N’ Go.

Actual average net income per year$275,000

Earnings for Gas N' Go($196,000)

(20%×$980,000)

Estimated excess earnings of Gas N' Go$79,000

($275,000-$196,000)

Management expect excess earning of four years ×4

Estimated goodwill of Gas N' Go $316,000

($79,000×4 years)