A firm is purchased for more than the fair market value of its assets. The excess is:
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A. B. C. D.B
Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm.
When a firm is purchased for more than the fair market value of its assets, the excess amount is typically referred to as "goodwill." Goodwill represents the intangible value of a company's reputation, customer relationships, brand recognition, and other factors that contribute to its overall worth beyond its tangible assets.
Therefore, the correct answer is B: It is considered as "Goodwill."
Goodwill is an intangible asset that arises from business acquisitions, where the purchase price exceeds the fair value of the net identifiable assets acquired. It reflects the premium paid by the acquiring company for the expected future benefits associated with the acquired firm.
Goodwill is recorded as an asset on the balance sheet and is subject to periodic impairment testing. Impairment occurs when the fair value of the reporting unit (a component of a company for which financial information is reported) falls below its carrying value (including goodwill). If impairment is identified, it is recorded as an expense on the income statement.
Option A, which states that the excess is considered a "premium paid" and amortized over the life of the acquired assets, is incorrect. While the excess is indeed a premium paid, it is not amortized over the life of the acquired assets. Instead, it is recorded as goodwill and tested for impairment.
Option C, which suggests that the excess is written off against retained earnings on the balance sheet, is also incorrect. Goodwill is not directly written off against retained earnings. Instead, it is reported as an asset on the balance sheet and tested for impairment annually.
Option D, which states that the excess is treated as an extraordinary loss and presented net of taxes on the income statement, is also incorrect. Goodwill is not treated as an extraordinary loss. It is a normal component of business acquisitions and is reported as an asset, not as a loss on the income statement.
In summary, when a firm is purchased for more than the fair market value of its assets, the excess amount is considered as "goodwill" and recorded as an intangible asset on the balance sheet. It is subject to periodic impairment testing and is not amortized over the life of the acquired assets.