21st June 2007, 5:07 PM
Quote:So GR, how does this translate to "good will"? Does anyone outside the company ever really notice you paid more than you could have for this or that company, and if they do, what does that mean to them?
The economic reality is that the physical building of the McDonald's restaurant is only worth $800,000, but I paid $1,000,000 for it. In recording this transaction, I debit my building account for the amount of $800,000 [which is the fair market value of the building], but I paid more than that to get the building, so I must also debit my goodwill account in the amount of $200,000. This is done to better reflect the economic reality of the transaction.
What it means to people outside of the company is that I don't have $1,000,000 worth of buildings, I only have $800,000. The remaining $200,000 is the extra I paid for the goodwill associated with it.
Sometimes you get the scorpion.