B52 Corporation’s pre-tax accounting income of $726,000 for the year 2018 includ
ID: 2586506 • Letter: B
Question
B52 Corporation’s pre-tax accounting income of $726,000 for the year 2018 included the following items:
Amortization of Identifiable Intangibles
140,000
Depreciation of Building
119,000
Loss from Discontinued Operations
46,000
Unusual, Non-Recurring Gains
157,000
Profit-Sharing Payments to Employees
69,300
Lush Industries Ltd. would like to purchase B52 Corporation. In trying to measure B52’s normalized earnings for 2018, Lush determines that the building’s fair value is triple the book value and that its remaining economic life is double the life that B52 is using. Lush would continue the profit-sharing payments to employees, with the payments being based on income from continuing operations before amortization and depreciation.
Required
1) Calculate the 2018 normalized earnings amount of B52 Corporation that Lush would use to calculate goodwill.
Amortization of Identifiable Intangibles
140,000
Depreciation of Building
119,000
Loss from Discontinued Operations
46,000
Unusual, Non-Recurring Gains
157,000
Profit-Sharing Payments to Employees
69,300
Explanation / Answer
1) Calculation of Normalized Earnings of B52 corporation for calculation of goodwill
Working Notes:-
1) As the fair value of the Building is 3 times its book value and the remaining useful life is double the current life the current depreciation should be multiplied by the factor 3/2 to compute future depreciation (i.e.119,000*3/2 = $178,500). As the amount of $119,000 is already deducted from the profits the additinal depreciation of $59,500 will be deducted for calculating normalised earnings.
2) Non recurring gains, loss from discontinued operations are not normal items and need to be adjusted. Similarly the amortization of intangible need to be adjusted.
Pre tax Accounting Income $726,000 Add: Loss from discontinued operations $46,000 Less: Unusual, Non recurring gains ($157,000) Add: Amortization of Identifiable Intangibles 140,000 Less: Additional Deprecition on Building in future [(119,000*3/2)-119,000] ($59,500) Normalised earnings 695,500Related Questions
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