Question

B52 Corporation’s pre-tax accounting income of $726,000 for the year 2020 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 2020, 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 2020 normalized earnings amount of B52 Corporation that Lush would use to calculate goodwill.

Answer 1

All amounts are in $

Normalized Earnings :

Pre tax accounting income = 726,000

Add : Amortization of intangibles = 140,000

Add : loss from discounted operations =46,000

Less : Unusual gains = 157,000

Less : Increase in depreciation = 59,500

Normalized Earnings = 695,500

Change in depreciation -

New depreciation would be (119,000 x 3)/2 = 178,500

(Because the market value is triple the book value and the useful life will be twice the time it is considered now)

Increase is depreciation = 178,500 - 119,000 = 59,500