Goodwill as an intangible asset emerges only during the purchase of a business for a price greater than the fair market value of the net assets acquired during the sale. For many assets, like cash, the fair market value (what an unpressured buyer would pay in an open marketplace) of an asset matches book value. For other assets, such as property, plant, and equipment, an independent appraisal shows fair value.
Net assets are total assets minus total liabilities. The following figure shows how ABC Corp., the purchaser, figures goodwill.
ABC Corp. buys XYZ Corp. for $350,000. The fair value of XYZ’s net assets is $315,000. ABC Corp. acquires $35,000 ($350,000 – $315,000) of goodwill in the transaction. To record this transaction on ABC’s books, debit each asset for fair value, credit each liability for fair value, and debit goodwill for $35,000.
What if the opposite happens and the selling price is less than the fair value of net assets? Well, there’s no such thing as negative goodwill. The purchaser records the difference as a gain. For example, if net assets are $150,000 and the purchase price is $100,000, record a gain on the purchaser’s books for $50,000.
