A feature of the purchase method of accounting includes the difference between the purchase price and the estimated fair market value of the net assets of the target firm must be classified as goodwill and recorded on the balance sheet.

Purchase Method

The purchase method is an accounting approach used in mergers and acquisitions, where the assets and liabilities of the acquired company are consolidated at their fair market values.

Fair Market Value

The price at which an asset would exchange between a willing buyer and a willing seller, each having reasonable knowledge of the relevant facts, and neither being under any compulsion to buy or sell.

Goodwill

An intangible asset that arises when a buyer acquires an existing business, representing the premium paid over the fair market value of the identifiable assets and liabilities.