Question

Assume that fast-food restaurants generally provide an ROI of 12%, but that such a restaurant near a college campus has an ROI of 15% because its relatively large volume of business generales an above average turnover (sales/assets). The replacement value of the restaurant's plant and equipment is $600,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 12% ROL Required: -1. Would you be willing to pay more than $600,000 for the restaurant near the campus? Yes O No 0-2. What is the maximum price you would be willing to pay for the business? Maximum Price b. If you purchased the restaurant near the campus for $750,000 and the fair value of the assets you acquired was $600,000, identify the account along with its balance, that is used to record the additional amount paid over the fair value of the assets. (Goodwill

Answer 1

a1) yes

a2) maximum amount that can be paid:$750000

FV of asset/Average ROI*ROI if invested in campus= $600000/.12*.15=$750000

b) Goodwill A/c Dr.: $150000

(Assets A/c Dr. $600000

Goodwill A/c Dr. $150000

To Bank A/c $750000

(Being goodwill recorded)