A purchaser is willing to pay for goodwill when the purchaser buys a company that has abnormal earning power.

Question

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Goodwill represents the premium that a purchaser is willing to pay when buying a company that has abnormal earning power, i.e., the ability to generate higher profits than the industry average. This is because the purchaser expects that this earning power will continue in the future, which justifies paying a higher price for the company's assets, including its brand, customer relationships, and intellectual property. However, if the company's earnings are not sustainable, there is no justification for paying a premium for goodwill.

A Purchaser Is Willing to Pay for Goodwill When the Purchaser