Assume that fast-food restaurants generally provide an ROI of 15%, but that such
ID: 2426386 • Letter: A
Question
Assume that fast-food restaurants generally provide an ROI of 15%, 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 $200,000. If you were to invest that amount in a restaurant elsewhere in town, you could expect a 15% ROI.
a-1.
Would you be willing to pay more than $200,000 for the restaurant near the campus?
a-2.
What is the maximum price willing to pay for the business?
b.
If you purchased the restaurant near the campus for $240,000 and the fair value of the assets you acquired was $200,000, identify the account used to record this amount, along with its balance.
Required:a-1.
Would you be willing to pay more than $200,000 for the restaurant near the campus?
No YesExplanation / Answer
1- a yes we are ready to pay more than 200000 to invest in restaurents near by campus as minimum required rate of return is 15% i.e 30000 but by investing near campus returns can be increased by 36000.
a-2 maximum amount of investment= additional profit = 36000-30000 = 6000
minimum required rate of return is 15% so additional investment can be done = 6000/15% = 40000
so total investment of 240000 can be done near campus to attain a profit of 15%.
b- we will use goodwill account to record the additional value of price paid.
asset debit 200000
goodwill debit 40000
to purchase consideration 240000