Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.

☛ Acquirer records cash decline of $500 to finance acquisition

☛ Acquirer’s PP&E increases by $100m

☛ Acquirer’s debt increases by $50m

☛ Acquirer records goodwill of $450m