Question

How is goodwill calculated? A. The amount paid to purchase a business in excess of the market value of its net assets. B. An estimate of the amount of contingent liability C. The profit made from the sale of an intangible asset. D. A discount given to a company that has been a major customer.

Answer 1

Goodwill is calculated as A. The amount paid to purchase a business in excess of the market value of its net assets.

Step-by-step explanation:

Goodwill is the quantification of the value of the name or reputation of a business. It is an intangible asset for the business that arises and is recorded as part of a business's value when it is sold. Goodwill is the additional amount paid by the buyer in excess of the amount that a business's tangible net assets are worth. Thus, goodwill can be calculated as the amount paid in to purchase a business in excess of the market value of its net assets.

For example, If a business is purchased for $100 whose net assets, which are Total assets less total liabilities, are worth $80. Then the goodwill is the $20 that is the difference of the amount paid to purchase the business and the value of its net assets.