The extra amount a company pays to buy another company beyond the value of its physical assets and identifiable intangible assets. It represents things like the target company's brand reputation, customer relationships, or market position. Goodwill appears on the buyer's balance sheet as an intangible asset.
A larger retail chain buys a popular local bakery. The bakery's equipment, inventory, and real estate are worth $500,000. However, the chain pays $700,000 because customers love the bakery's brand and recipes. The extra $200,000 is recorded as goodwill on the chain's balance sheet.
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