Lump Sum Purchase of Assets

Businesses often purchase several assets as a group, or “basket,” for a single lump-sum amount. This type of transaction is called either a lump-sum purchase of assets or a basket purchase of assets. For accounting purposes, we have to allocate the purchase price to the individual assets. This is done by allocating the total cost based on their fair values. Let’s look at an example: We purchase land and a building for $450,000. Land is valued at $100,000 and building is valued at $400,000. So, what is the journal entry to record the purchase? Well, we can’t debit the assets for their fair market value because we paid less when we bought them in a group. Thus the debits wouldn’t equal the credits. Additionally, we can’t record the credit for the fair value because we didn’t pay that much and assets must be recorded at their costs. So we need to allocate the purchase price of the assets and we do this based on their relative value to the total value of the group. You might wanna pause the video and write down this table in your notes. Let me explain the table while you’re doing that. We start by listing the fair market value of the assets in the group and then summing the total value of the group. Okay, in this case, $500,000. We then divide the fair market value of each asset by the fair market value of the group. In this case, land is 20% of the total and building is 80% of the total. Finally, we multiply the relative percentages by the purchase price to determine how much of the purchase price should be allocated to land and how much allocated to building. Now we can record the purchase of these assets by debiting Land for $90,000 and Building for $360,000 and crediting Cash for $450,000.

3 comments on “Lump Sum Purchase of Assets

Leave a Reply

Your email address will not be published. Required fields are marked *