Smith Corporation is interested in acquiring Dawson Company and has obtained the following information about Dawson:
Daws on's net income has averaged $\$180,000$ for the past five years. This average is expected to continue in perpetuity The book value of Dawson's recorded net ass ets is $\$600,000$
Dawson owns a fully depreciated building with a market value of $\$150,000$ .
Dawson has title to a patent with a market value of $\$40,000$ , which is not included in Dawson's recorded net as sets.
The market value of Dawson's recorded net assets(excluding $c$ and $d$ above) is $\$1,000,000$ .
In evaluating the Dawson data, Smith believes that a 12% discount rate is appropriate.
Required:
Calculate each of the following and provide all necessary computations to support your
a. Based on the information provided, what price shoudd Smith be willing to pay to acquire Dawson?
b. What portion of the puchase price should Smith capitalize as purchased goodwill?

To calculate the price Smith should be willing to pay to acquire Dawson, we can use the capitalized earnings method. This method involves dividing the average net income by the discount rate to determine the capitalized value.

First, we calculate the capitalized value of Dawson's net income:
$\text{Capitalized Value}=\text{Average Net Income}/\text{Discount Rate}$
$\text{Capitalized Value}=\$180,000/0.12$
$\text{Capitalized Value}=\$1,500,000$

Next, we add the market value of the fully depreciated building and the patent, since these are not included in Dawson's recorded net assets:
$\$1,500,000+\$150,000+\$40,000=\$1,690,000$

Finally, we add the market value of Dawson's recorded net assets (excluding the fully depreciated building and the patent) to get the total price Smith should be willing to pay to acquire Dawson:
$\$1,690,000+\$1,000,000=\$2,690,000$

So, based on the information provided, Smith should be willing to pay $\$2,690,000$ to acquire Dawson.

B: To calculate the portion of the purchase price that Smith should capitalize as purchased goodwill, we can subtract the market value of Dawson's recorded net assets from the total price Smith should be willing to pay:
$\$2,690,000-\$1,000,000=\$1,690,000$

Therefore, Smith should capitalize $\$1,690,000$ as purchased goodwill.