QUESTION 15 OF 32

What is goodwill and why do companies use it?

Goodwill is an intangible asset that arises when one company purchases another for a premium value. The value of a company's brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent goodwill.

Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet.

Goodwill happens to be an intangible asset which is defined as an excess value of the price of purchase over market value in any business that has been acquired.

An example can be used to explain this. If Walmart has been sold for over a 100 billion dollars with PP&E book with value of over 50 billion, an equity which is of 30 billion and another debt of 10 billion.

The goodwill is then paid for at Walmart and it would be of 30 billion- the whole sale price minus the value of the book which is of 70 billion.

The goodwill of a business is typically determined by subtracting the fair market value of the tangible assets from the total business value. Business goodwill is also determined by the capital surplus earnings method, which calculates the fair market value of the business assets, determines the fair rate of return on said assets and subtracts the return from the company's total earnings. The resulting excess earnings is the goodwill of the company.

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What is goodwill and why do companies use it?

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