Kivi Service Stations is considering expanding its operations to include the greater Dubuque area. Rather than build new service stations in the Dubuque area, management plans to acquire existing service stations and convert them into Kivi outlets.
Kivi is evaluating two similar acquisition opportunities. Information relating to each of these service stations is presented below:
| Joe’s Garage | Gas N’ Go |
Estimated normal rate of return on net assets | 20% | 20% |
Fair value of net identifiable assets | $950,000 | $980,000 |
Actual average net income for past five years | 220.000 | 275,000 |
Instructions
a. Compute an estimated fair value for any goodwill associated with Kivi purchasing Joe’s Garage. Base your computation upon an assumption that successful service stations typically sell at about 9.25 times their annual earnings.
b. Compute an estimated fair value for any goodwill associated with Kivi purchasing Gas N’ Go. Base your computation upon an assumption that Kivi’s management expects excess earnings to continue for four years.
c. Many of Kivi’s existing service stations are extremely profitable. If Kivi acquires Joe’s Garage or Gas N’ Go. should it also record the goodwill associated with its existing locations? Explain.
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