Goodwill in accounting refers to the differential amount paid by a company for the acquisition of another company over and above the fair market value of the net assets purchased. It is essentially the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities acquired.

Example: Let's say Company A acquires Company B for $10 million. Company B has identifiable assets with a fair market value of $8 million and liabilities of $2 million. The calculation for goodwill would be as follows:

1. Determine the fair value of the net assets: $8 million (assets) - $2 million (liabilities) = $6 million.
2. Calculate the goodwill: $10 million (purchase price) - $6 million (net assets) = $4 million.

In this example, the goodwill is $4 million, which represents the premium that Company A paid for the expected future benefits from acquiring Company B, such as its brand name, customer base, and employee talent.

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Goodwill is created when one company acquires another for a price higher than the fair market value of its assets; for example, if Company A buys Company B for more than the fair value of Company B's assets and debts, the amount left over is listed on Company A's balance sheet as goodwill.read more >>