QQuestionAccounting
QuestionAccounting
"How do companies acquire goodwill?
What are examples of intangible assets and how are they amortized?"
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Answer
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Step 1: Understanding Goodwill
Goodwill is an intangible asset that arises when a company acquires another company for a price higher than the fair market value of its net assets. It represents the premium paid for factors such as reputation, customer base, patents, and trademarks that are not individually identified and valued but contribute to the company's earning capacity.
Step 2: Process of Acquiring Goodwill
When Company A acquires Company B, if the purchase price is higher than the fair market value of Company B's net identifiable assets, the difference is recorded as goodwill. This goodwill is recorded as an intangible asset on Company A's balance sheet.
Final Answer
Goodwill is acquired when one company purchases another for a price higher than the fair market value of its net assets. Intangible assets like patents, trademarks, copyrights, franchises, and goodwill can be amortized over their useful lives if they have a finite legal or economic life. Amortization helps spread the cost of these assets over their useful lives, reducing their carrying value on the balance sheet each year until they reach zero.
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