Question

At the time of her death, Betty owned 70% of the stock of Crane Corporation. Over the past five years, Crane reported an average net profit of $240,000, and the book value of its stock is $720,000. Assume that 8% is an appropriate after-tax rate of return for Crane’s type of business.

If required, round all computations to the nearest dollar.

a. What is the amount of Crane’s goodwill?

b. How much as to the Crane stock is included in Betty’s gross estate?

Answer 1

a) Computation of Goodwill:- ( in $'s)

Book value of stock of Crane = 720,000

Rate of return for this type of

business ( after tax) = 8%

i.e amount of expected return for Crane after tax = 720,000 X 8% = 57,600 (1)

Average net profit for 5 years as per the question = 240,000 (2)

Goodwill amount for Crane = Average net profit actual gained - Expected amount of return

therfore Goodwill for Crane = 240,000-57,600 = $ 182,400

b) The amount of Crane stock included inBetty's gross estate is = 720,000 X 70%= $ 504,000.

( 70% of stock is owned by Betty)