What occurs when one company acquires another for more than the appraised fair market value of its assets?

When one company acquires another for an amount that exceeds the appraised fair market value of its assets, the excess amount that is paid is recorded as goodwill on the acquiring company's balance sheet. Goodwill represents the premium a buyer is willing to pay for a target company’s perceived value that surpasses its identifiable tangible and intangible assets. This can include elements like brand reputation, customer relationships, employee talent, and proprietary technology that may not be fully reflected in the appraised fair market value.

In essence, goodwill captures the intangible factors that make a company valuable beyond its physical and measurable assets, which is why it is recognized as an asset in financial reporting. This accounting practice highlights how mergers and acquisitions can recognize not only the tangible assets acquired but also the strategic value inherent in the overall business operation.

The other options, while they are related to assets, do not specifically define the situation of paying a premium over fair market value in an acquisition context the way goodwill does. A franchise, patent, and intangible asset all have their own specific meanings but do not directly address the excess payment scenario that goodwill specifically encapsulates.