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Dear joke3,

When a company makes a acquisition with cash and goodwill is involved, in the 10-Q when they discuss the price paid is that including goodwill or is that subject to be something hidden in the notes and goodwill has to be added in ?

Goodwill is essentially the number used to "balance things out". When a company buys another, the first thing that is done is write up assets to "fair value" (e.g. property is carried at historical cost, but may have increased in value since then), any gains go to equity. We get a new value for shareholder's equity. Any excess purchase price is then added to goodwill.

Company X buys Company Y for $500,000. Here are Company Y's balance sheets (P&E = property & equipment)

Y's Assets

Cash 50,000
P&E 100,000 (fair value 200,000)


Y's Liabilities + Shareholder's equity

LT debt 20,000
Equity 130,000

First step would be to "rewrite" these statements to reflect the increase in the value of the property:

Y's Assets (rewritten)

Cash 50,000
P&E 200,000


Y's Liabilities + Shareholder's equity (rewritten)

LT debt 20,000
Equity 230,000

Now the shareholder's equity is $230,000. The "excess" amount is $270,000. This would be the goodwill generated by this transaction (and added to the asset side of company "X" after the acquisition). On the liability side, the LT debt would be added, as would $500,000 (the purchase price) in equity.

Add to X's balance sheets:

Assets

Cash 50,000
P&E 200,000
Goodwill 270,000


Liabilities + Shareholder's equity

LT debt 20,000
Equity 500,000

Did that make any sense? Incidentally, we're discussing purchase/pooling in the Boring Study Group, if you're interested.

Best,

Lleweilun Smith
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