Goodwill is the present value of future earnings in excess of normal returns on
identifiable assets. It is important to realize that the valuation of goodwill does
not attempt to measure past earnings performance. For 30 years Gladstone’s
business generated returns in excess of what may be considered normal for a
small service station. However, the competitive threat of a new station coming
to town, combined with the potential environmental threat of a leaky storage
tank, reduces expectations that future performance will equal or exceed past
performance. Thus, these issues should reduce, or eliminate completely,
Gladstone’s $500,000 estimate of goodwill.
Goodwill is the present value of future earnings in excess of normal returns on
identifiable assets. It is important to realize that the valuation of goodwill does
not attempt to measure past earnings performance. For 30 years Gladstone’s
business generated returns in excess of what may be considered normal for a
small service station. However, the competitive threat of a new station coming
to town, combined with the potential environmental threat of a leaky storage
tank, reduces expectations that future performance will equal or exceed past
performance. Thus, these issues should reduce, or eliminate completely,
Gladstone’s $500,000 estimate of goodwill.
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