In the acquisition example, what is the goodwill recognized on the acquirer’s balance sheet?

• A. 2
• B. 0
• C. 4
• D. 8

Answer: (A)

Goodwill arises when the price paid in an acquisition exceeds the fair value of the identifiable net assets acquired. It represents the premium for things not separately identifiable, like brand value, customer relationships, and expected synergies.

To get goodwill, you subtract the fair value of the net identifiable assets (fair value of identifiable assets minus liabilities assumed) from the purchase price. If the example ends up with a goodwill of 2, it means the purchase price exceeded the net identifiable assets by 2. For instance, if the acquirer pays 12 for assets with a fair value of 10 and liabilities of 0, goodwill would be 2.

Goodwill is recorded as an intangible asset on the balance sheet and is not amortized; it’s tested for impairment periodically. If the purchase price were exactly equal to the net identifiable assets, there would be no goodwill. If the purchase price were less than the net identifiable assets, a bargain purchase would generate a gain.