Why do we allocate the basket purchase price to individual assets?
In order to correctly show the assets in the records of the business and to allow the correct depreciation calculations to be carried out, it is necessary to allocate the basket purchase price to the individual assets acquired. Suppose a business acquires a group of assets comprising property, plant and equipment for 35,000.
What is an example of basket purchase?
In the above example the basket purchase of assets related to items of property, plant, and equipment and the allocation divided the price into these three categories. The same technique can equally be applied to assets of a similar nature.
What is the journal entry for Basket purchase?
Having allocated the purchase price of 35,000 to each of the individual assets, it can now be recorded with the following basket purchase journal entry. In the above example the basket purchase of assets related to items of property, plant, and equipment and the allocation divided the price into these three categories.
Why are assets initially recorded at market value?
D. Assets are initially recorded at market value because historical cost tends to be too arbitrary C. Assets are initially recorded using the historical cost principle The principal of conservatism is concerned with: A. The avoidance of overstating assets or income in the preparation of the income statement B.
What is a basket purchase of assets?
A basket purchase is a purchase of multiple assets for a single price. The company must determine based on the appraised values of the assets how much of the purchase price they should attribute to each asset class.
How do we account for a basket purchase?
A basket purchase usually arises when the buyer has the opportunity to acquire a number of assets at a price below their combined market values. When multiple assets are acquired in this manner, the accountant typically records the cost of the assets individually in the fixed assets register.
What is a basket purchase of assets when a basket purchase is made How is cost assigned to individual assets?
A basket purchase of assets is when a group of assets is purchased for a single purchase price. Some examples of that are buildings, land and equipment. Even though a group of assets are purchased together, the purchase price is allocated among the different assets.
How do you record an asset purchase?
To record the purchase of a fixed asset, debit the asset account for the purchase price, and credit the cash account for the same amount. For example, a temporary staffing agency purchased $3,000 worth of furniture.
Why is it necessary to allocate the cost of a basket purchase to the individual assets included in the purchase price?
It is necessary to allocate a lump sum payment to individual items in order to record a fair portion of the lump sum in each of the proper general ledger accounts.
What is asset acquisition?
An asset acquisition strategy is when one company buys another company through the process of buying its assets, as opposed to a traditional acquisition strategy, which involves the purchase of stock.
When assets are purchased in a group for a single sum it is referred to as a?
When assets are purchased in a group for a single sum, it is referred to as a. basket purchase.
What is a gain or loss on sale of asset?
Definition of Gain or Loss on Sale of an Asset The gain or loss on the sale of an asset used in a business is the difference between 1) the amount of cash that a company receives, and 2) the asset's book value (carrying value) at the time of the sale.
How are the costs of property, plant, and equipment determined when purchased?
When property, plant, and equipment are purchased for cash, the acquisition price is easy to determine. It is the asset's net cash equivalent price paid plus all other costs necessary to get the asset ready to use.
Is asset purchase an expense?
The purchase of a capital asset such as a building or equipment is not an expense.
What is the purchase method of accounting?
Purchase Method in accounting is a process of inventory costing whereby a company purchases goods and services for cash. It is a common accounting method used to account for the purchase of stock on hand, or also known as inventory.
Is the purchase of equipment treated as an expense?
The purchase of equipment is not accounted for as an expense in one year; rather the expense is spread out over the life of the equipment. This is called depreciation. From an accounting standpoint, equipment is considered capital assets or fixed assets, which are used by the business to make a profit.
Basket Purchase Allocation Example
Suppose a business acquires a group of assets comprising property, plant and equipment for 35,000. The estimated fair market value of the individual assets is as shown in the table below:
Basket Purchase Allocation Journal Entry
Having allocated the purchase price of 35,000 to each of the individual assets, it can now be recorded with the following basket purchase journal entry.
Basket Purchase of Similar Assets
In the above example the basket purchase of assets related to items of property, plant, and equipment and the allocation divided the price into these three categories. The same technique can equally be applied to assets of a similar nature.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.
