Crash Course in Accounting and Financial Statement Analysis, Second Edition

Goodwill

Goodwill (recorded on the balance sheet) is the amount by which the purchase price for a company exceeds its fair market value (FMV), representing the intangible value stemming from the acquired company’s business name, customer relations, and employee morale.

Big-Time Acquires Johnny’s Interiors The fair market value (FMV) of a local New York furniture company, Johnny’s Interiors, is determined to be $5 million in 2005. A national furniture company, Big-Time Furniture, believes that under its proven management and expertise, Johnny’s Interiors would be worth much more than the FMV implies and thus decides to acquire Johnny’s Interiors for $8 million, $3 million above the FMV. The $3 million Big-Time paid above the FMV is recorded as goodwill on its balance sheet.