What is Goodwill?
Goodwill is the amount by which the price paid for a business exceeds the fair value of the identifiable net assets acquired. Identifiable assets includes tangible as well as intangible assets such as trade marks and customer lists.
Fair value often differs from book value (the amounts shown in the accounting records), and assets and liabilities need to be revalued at the acquisition date as shown in the table below.
If in the above example the business was purchased for say 37,000, then the goodwill would be calculated as follows:
Goodwill = Purchase price - Fair value of net assets Goodwill = 37,000 - 23,000 = 14,000
Goodwill is an intangible asset and is shown on the balance sheet under the heading of long-term or non-current assets.
For further information see the Wikipedia definition.
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