Under which circumstance would Goodwill increase?

Under which circumstance would Goodwill increase?

• A. It increases when the company is acquired and the purchase price exceeds identifiable assets
• B. The company issues stock
• C. The company sells assets
• D. The company reduces cash

Answer: (A)

Goodwill increases when a company is acquired for a price that exceeds the fair value of its identifiable net assets. The extra amount paid reflects intangible value—things like brand strength, customer relationships, synergies, and other expected benefits that aren’t separately identifiable on the balance sheet. That premium is recorded as goodwill on the acquirer’s books. Other actions don’t create goodwill. Issuing stock changes the company’s equity and financing, not the value of acquired intangible assets. Selling assets or reducing cash affects assets directly but doesn’t generate the premium over identifiable net assets that goodwill represents.

Goodwill increases when a company is acquired for a price that exceeds the fair value of its identifiable net assets. The extra amount paid reflects intangible value—things like brand strength, customer relationships, synergies, and other expected benefits that aren’t separately identifiable on the balance sheet. That premium is recorded as goodwill on the acquirer’s books.

Other actions don’t create goodwill. Issuing stock changes the company’s equity and financing, not the value of acquired intangible assets. Selling assets or reducing cash affects assets directly but doesn’t generate the premium over identifiable net assets that goodwill represents.