Sunday, June 3, 2012

Calculate Accounting Goodwill

When a company has been operating and has gained a reputation and a large customer base, it has been generating a profit that will be valuated at the time of purchase or revaluation. Basically, it arises from such assets which are not easily identifiable and therefore cannot be recognized separately by an accountant.

For example, market knowledge, repute among customers, product expertise are all examples of goodwill too.  These things are with the entity and cannot be separated from it easily without a complete sale of the business as a going concern.

Generally, during a complete business acquisition (when the parent company controls 50%+ voting stock of a target subsidiary), goodwill can be estimated by using the following accounting equation:

How to Calculate Accounting Goodwill:

Net Assets at Fair Market Value (FMV)= Fair Market Value of Assets - Liabilities 

Accounting Goodwill Equation

Goodwill= Purchase Price of Company - Net Assets are Fair Market Value (FMV)

For example,  A buys a company for $1000, the net assets are only $800, so according to the equation goodwill should be recognized , 1000-800 =200

The remaining amount is goodwill of $200.

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