Question

Assume that fast-food restaurants generally provide an ROI of 14%, but that such a restaurant near a college campus has an ROI of 18% because its relatively large volume of business generates an above-average turnover (sales/assets). The replacement value of the restaurant’s plant and equipment is $207,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 14% ROI.

Required:

a-1. Would you be willing to pay more than $207,000 for the restaurant near the campus?

	Yes
	No

a-2. What is the maximum price you would be willing to pay for the business? (Do not round intermediate calculations.)

b. If you purchased the restaurant near the campus for $266,143 and the fair value of the assets you acquired was $207,000, identify the account along with its balance, that is used to record the additional amount paid over the fair value of the assets.

Answer 1

a-1)

Yes, I would be willing to pay more than $207,000 for the restaurant near the campus since it will provide large volume of business and thus a higher ROI.

a-2)

Maximum price I would be willing to pay for the restaurant = 207,000 x 18/14

= $266,143

Even by investing $266,143 in the restaurant near the campus, it will provide an ROI of 14%

b)

Goodwill is used to record the additional amount paid over the fair value of the assets.

Purchase price of restaurant = $266,143

Fair value of the assets acquired = $207,000

Hence, goodwill acquired = Purchase price of restaurant - Fair value of the assets acquired

= 266,143 - 207,000

= $59,143