1
ACC 405
Module 1 Project
Practice Problems and Solutions
Southern New Hampshire University
, 2
ACC-405
Module 1 Practice Problems and Solutions
Problem 1. Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in
2020. To assess the amount it might be willing to pay, Plantation Homes makes the following
computations and assumptions.
Condominiums, Inc. has identifiable assets with a total fair value of $15,000,000 and liabilities of
$8,800,000. The assets include office equipment with a fair value approximating book value, buildings with
a fair value 30% higher than book value, and land with a fair value 75% higher than book value. The
remaining lives of the assets are deemed to be approximately equal to those used by Condominiums,
Inc.
Condominiums, Inc.'s pretax incomes for the years 2017 through 2019 were $1,200,000, $1,500,000, and
$950,000, respectively. Plantation Homes believes that an average of these earnings represents a fair estimate
of annual earnings for the indefinite future. However, it may need to consider adjustments to the following
items included in pretax earnings:
Depreciation on buildings (each year) 960,000
Depreciation on equipment (each year) 50,000
Extraordinary loss (year 2019) 300,000
Sales commissions (each year) 250,000
The normal rate of return on net assets for the industry is 15%.
Required:
Assume further that Plantation Homes feels that it must earn a 25% return on its investment and that
goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a
reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill.
Ignore tax effects.
Assume that Plantation Homes feels that it must earn a 15% return on its investment, but that average
excess earnings are to be capitalized for three years only. Based on these assumptions, calculate a
reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill.
Ignore tax effects.
Solution
Part A Normal earnings for similar firms = ($15,000,000 - $8,800,000) x 15% =
$930,000 Expected earnings of target:
Pretax income of Condominiums, Inc., 2017 $1,200,000
Subtract: Additional depreciation on building ($960,000 30%) (288 ,000)
Target’s adjusted earnings, 2017 912,000
Pretax income of Condominiums, Inc., 2018 $1,500,000
Subtract: Additional depreciation on building (288 ,000)
Target’s adjusted earnings, 2018 1,212,000
Pretax income of Condominiums, Inc., 2019 $950,000
ACC 405
Module 1 Project
Practice Problems and Solutions
Southern New Hampshire University
, 2
ACC-405
Module 1 Practice Problems and Solutions
Problem 1. Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in
2020. To assess the amount it might be willing to pay, Plantation Homes makes the following
computations and assumptions.
Condominiums, Inc. has identifiable assets with a total fair value of $15,000,000 and liabilities of
$8,800,000. The assets include office equipment with a fair value approximating book value, buildings with
a fair value 30% higher than book value, and land with a fair value 75% higher than book value. The
remaining lives of the assets are deemed to be approximately equal to those used by Condominiums,
Inc.
Condominiums, Inc.'s pretax incomes for the years 2017 through 2019 were $1,200,000, $1,500,000, and
$950,000, respectively. Plantation Homes believes that an average of these earnings represents a fair estimate
of annual earnings for the indefinite future. However, it may need to consider adjustments to the following
items included in pretax earnings:
Depreciation on buildings (each year) 960,000
Depreciation on equipment (each year) 50,000
Extraordinary loss (year 2019) 300,000
Sales commissions (each year) 250,000
The normal rate of return on net assets for the industry is 15%.
Required:
Assume further that Plantation Homes feels that it must earn a 25% return on its investment and that
goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a
reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill.
Ignore tax effects.
Assume that Plantation Homes feels that it must earn a 15% return on its investment, but that average
excess earnings are to be capitalized for three years only. Based on these assumptions, calculate a
reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill.
Ignore tax effects.
Solution
Part A Normal earnings for similar firms = ($15,000,000 - $8,800,000) x 15% =
$930,000 Expected earnings of target:
Pretax income of Condominiums, Inc., 2017 $1,200,000
Subtract: Additional depreciation on building ($960,000 30%) (288 ,000)
Target’s adjusted earnings, 2017 912,000
Pretax income of Condominiums, Inc., 2018 $1,500,000
Subtract: Additional depreciation on building (288 ,000)
Target’s adjusted earnings, 2018 1,212,000
Pretax income of Condominiums, Inc., 2019 $950,000
