Final answer:
When a company acquires another company for an amount greater than the fair market value of its net assets, it records the excess as 'Goodwill' in its balance sheet.
Step-by-step explanation:
If a company buys another company and pays more than the fair market value of the other company's net assets, then it will debit Goodwill. Goodwill is an intangible asset that represents the excess payment made over the fair market value of the net assets during an acquisition. This item appears on the balance sheet and reflects factors like brand reputation, customer relations, and intellectual property that do not have a specific tangible value but contribute to future earnings.
The options provided:
a. Goodwill - This is the correct answer.
b. Accumulated depreciation - This is related to the reduction in value of tangible fixed assets over time.
c. Accounts payable - This represents the short-term liabilities or obligations to pay for services or goods received.
d. Common stock - It represents the owner's equity in the company, not an intangible asset like Goodwill.