Question

Question 4:

Abu Baker purchased an on-going business for a price of OMR 76000. The agreed valuation of assets and liabilities were as follows:

Premises	55000	Bank Loan	12600
Short-term bonds	9900	Short-term investment	13900
Inventories	1200	Unpaid Electricity	450
Trade Payables	13500	Motor Vehicle	11000
Trade Receivables	6700	Bank Deposits	5600

(a) Calculate the value of goodwill.          

In 2019, Abu Baker developed a new product that will be in the market by 2020. In connection with the development of this product, the following costs were incurred in 2019:

• • Research and development cost OMR 220000
• • Materials and supplies consumed OMR 35000
• • Compensation paid to research consultants OMR 25000
• • It is anticipated that these costs will be recovered in 2025.

(b) What is the amount of research and development cost that Abu Baker should record in 2019 as an amortization expense.

Answer 1

a) Value of Goodwill to be computed as follows:

Goodwill = Cost of Investment - Net Worth

Net worth of the company = Assets - Liabilities

Total Assets = Premises + Inventories + Trade Receivables + Short Term Investment + Motor Vehicle + Bank Deposits

= 55000 + 1200 + 6700 + 13900 + 11000 + 5600

= 93400

Total Liabilities = Short term bonds + Trade Payables + Bank Loan + Unpaid Electricity

= 9900 + 13500 + 12600 + 450

= 36450

Net Worth of the company = 93400 - 36450

= 56950

Goodwill = Cost of Investment - Net Worth

= 76000 - 56950

= OMR 19050

b) Research Cost to be amortized over the useful life ie 2019 - 2025 as the cost is expected to be recovered by then. Therefore it is to be amortized over 7 years

Amortization for the year 2019 = Total Research and Development Cost / number of years

= 220000+25000+35000

7

= 280000/7

= OMR 40000