How is goodwill calculated?

Goodwill is calculated by taking the purchase price of an acquired company and subtracting the fair value of its net identifiable assets at the time of acquisition. This means that goodwill represents the premium that a buyer is willing to pay over the fair value of the tangible and identifiable intangible assets acquired in the transaction.

The reason this calculation is crucial is that it reflects intangible factors that contribute to a company's value, such as brand reputation, customer relationships, and other competitive advantages that do not appear on the balance sheet as physical assets. By determining the difference between the purchase price and the fair value of net assets, it ensures that any excess amount paid is recognized as goodwill, highlighting the value that exceeds the net identifiable assets.

The other choices do not accurately encapsulate the concept of goodwill. For instance, calculating acquisition cost plus operational expenses or market value of shares minus the purchase price does not focus on the effective acquisition of business assets and liabilities, which is central to determining goodwill. Understanding how goodwill is derived helps in accurately assessing a company's fair market value in mergers and acquisitions.