The Owners of Dallas Electronics Store Are Contemplating Selling the Business

question 40

Multiple Choice

The owners of Dallas Electronics Store are contemplating selling the business. The cumulative earnings for the past 5 years totalled $ 900,000, including a gain on discontinued operations of $ 30,000. The annual earnings based on an average rate of return on investment for this industry would have been $ 138,000. If excess earnings are to be capitalized at 15%, then implied goodwill should be

• A) $ 210,000.
• B) $ 280,000.
• C) $ 240,000.
• D) $ 870,000.

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Definitions:

Direct Labor

The work of factory employees that can be directly associated with converting raw materials into finished goods.

Product Cost

The total cost associated with producing or manufacturing a product, including materials, labor, and overhead.

Factory Overhead

All costs related to manufacturing that are not direct materials or direct labor expenses.

Cost Allocation

The process by which factory overhead or other costs are assigned to a cost object, such as a job.