More on Goodwill

As we just discussed, the purchase method generally leads to the creation of an intangible asset called goodwill. Pre-2001 guidelines required firms to amortize this goodwill,

3Remember, there are assets such as employee talents, good customers, growth opportunities, and other intangibles that don't show up on the balance sheet. The $2 million excess pays for these.

4You might wonder what would happen if the purchase price were less than the estimated fair market value. Amusingly, to be consistent, it seems that the accountants would need to create a liability called ill will! Instead, the fair market value is revised downwards to equal the purchase price.

© The McGraw-Hill Companies, 2002

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

25. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

PART EIGHT Topics in Corporate Finance

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