Goodwill in this scenario is best described as the excess of purchase price over which figure?

• A. Seller's Liabilities
• B. Seller's Assets
• C. Seller's Equity (Book Value)
• D. Purchase Price

Answer: (C)

Goodwill represents the premium a buyer pays over the net asset value of the company being acquired. In acquisition accounting, you first allocate the purchase price to the identifiable assets and liabilities at their fair values, and the difference between the purchase price and the net identifiable assets is recorded as goodwill. In many introductory contexts, that net asset base is proxied by the seller’s equity (book value). So, goodwill is the excess of the purchase price over the seller’s equity (book value).

For example, if the purchase price is 1,000 and the seller’s equity (book value) is 600, the goodwill would be 400. The other options don’t represent the net asset base against which the purchase price is compared to determine goodwill.