An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called
A development.
B a bargain purchase.
C accretion.
D goodwill.
The correct answer and explanation is:
Correct Answer: D. Goodwill
Explanation:
Goodwill is an intangible asset that arises during the acquisition of one company by another. It represents the amount paid by the acquiring company over and above the fair value of the net identifiable assets of the acquired company. These net identifiable assets include tangible assets (like equipment, inventory, and property) and identifiable intangible assets (like patents and trademarks), minus any liabilities.
In accounting, goodwill is calculated using the formula:
Goodwill = Purchase Price – Fair Value of Net Identifiable Assets
This means if a company buys another business for a price higher than the fair market value of its assets and liabilities, the excess amount is recognized as goodwill. This excess can be attributed to factors such as brand reputation, loyal customer base, skilled workforce, and future earning potential that are not separately recognized as tangible or identifiable intangible assets.
Goodwill is not amortized under International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (GAAP). Instead, it is tested annually for impairment, meaning companies must evaluate whether the goodwill still retains its value or if it should be reduced due to a decline in the value of the acquired business.
Let’s clarify why the other options are incorrect:
- A. Development refers to costs incurred during the development phase of an intangible asset, such as software or product innovation, not an acquisition-related intangible.
- B. A bargain purchase occurs when the purchase price is less than the fair value of net assets acquired. It results in a gain, not goodwill.
- C. Accretion relates to the gradual increase in value of a financial asset, such as a bond or asset retirement obligation, and not an acquisition-related concept.
Therefore, goodwill is the correct and most appropriate answer.