Question

Give an example of goodwill if a business were to pay a premium over the fair value of the assets acquired. What potentially could be the basis of this goodwill?

Answer 1

We usually calculate the goodwill, once we purchase another company or acquire shares from the partnership. Goodwill usually calculated to match the book value and market value of the company. To determine the market or book value of a business, accountants usually combine the values of the business's tangible assets. In some cases, a company may purchase another company's business for more than its appraised value. When this happens, the difference between the value of the business's tangible assets value fewer liabilities taken and the purchase price is goodwill. Goodwill is a premium that a purchasing company pays a selling company for the privilege of buying its business. The purpose of goodwill is to compensate the seller for the effort he put into building the business. For accounting purposes, each company treats goodwill as a tangible asset with a set value that is equal to the difference between the market or book value of the business, and the amount the purchasing company paid for it.

Goodwill is an extra burden for the buyer and extra benefit for the seller.

Goodwill = Purchase consideration- Book or Market value of (Asset-Liability) Taken from the selling company.