Goodwill is recorded as an intangible asset only when one entity purchases the entire
assets and liabilities of another entity.  This typically happens when one company
purchases another.  The purchase might happen for strategic reasons, such as
to enhance the market position or profitability of the acquiring company.
Goodwill can be defined as the excess of cash paid, beyond the fair market
value of the net assets acquired.  The term net assets means "assets - liabilities."
Here's a formula:  Goodwill = Cash Paid minus (Assets Acquired minus Liabilities Acquired)
Johnson Company pays $1,000,000 to acquire Mercury Company.  At the time
of the acquisition, Mercury's balance sheet appears as follows:
Cash 100,000
Marketable Securities 200,000
Inventory 500,000
Land 25,000
Buildings 75,000
Total assets on Merc's books 900,000
Accounts Payable 50,000
Notes Payable 50,000
Total Liabilities of Mercury 100,000
Note that we only consider Assets and Liabilities of the acquired company.
At the time of acquisition it was determined that the land was really worth
50,000 (market value) and the building was worth 100,000.
Figuring the Goodwill:
Write up the values of the land and building, so that all assets are at fair
market value.
Cash 100,000
Marketable Securities 200,000
Inventory 500,000
Land 50,000
Buildings 100,000 950,000
Accounts Payable 50,000
Notes Payable 50,000 100,000
FMV of net assets 850,000
Cash paid by Johnson: 1,000,000
2.  Compute the Goodwill = Cash Paid minus FMV of Mercury's assets:
Goodwill 150,000
The goodwill will be shown on the books of Johnson as an asset, and all of
Mercury's assets will appear as assets on Johnson's books at their FMV's.
Goodwill is not amortized; write it down, however, if it is permanently impaired.