Eden Company Is Trying to Decide Whether to Acquire Bloomington

question 18

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.

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Definitions:

Troposphere

The lowest layer of Earth's atmosphere where most weather phenomena and life as we know it exists.

Stratosphere

The stratosphere is the second major layer of Earth's atmosphere, located above the troposphere and characterized by a temperature inversion with altitude.

Hydrocarbons

Organic compounds consisting entirely of hydrogen and carbon, found in fossil fuels and used as a primary energy source and raw material in chemical manufacturing.

Suspended Particles

Tiny solid or liquid particles that are suspended in air or water, which can be harmful to human health and the environment when inhaled or ingested.