9.3.4: Lump Sum Purchases

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There are instances where a business may purchase a group of PPE assets for a single price. This is referred to as a lump sum, or basket, purchase. When this occurs, the accounting issue is how to allocate the purchase price to the individual components purchased. The normal practice is to allocate the purchase price based on the relative fair value of each component. Of course, this requires that information about the assets' fair values be available and reliable. Often, insurance appraisals, property tax assessments, depreciated replacement costs, and other appraisals can be used. The reliability and suitability of the source used will be a matter of judgment on the part of the accountant.

Consider the following example. A company purchases land and building together for a total price of $850,000. The most recent property tax assessment from the local government indicated that the building's assessed value was $600,000 and the land's assessed value was $150,000. The total purchase price of the components would be allocated as follows:

Land	$\frac{150,000 \times 850,000}{(150,000+600,000)}$	=	$170,000
Building	\frac{600,000 \times 850,000}{(150,000+600,000)}	=	$680,000
Total		=	$850,000

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Land	\(\frac{150,000 \times 850,000}{(150,000+600,000)}\)	=	$170,000
Building	\frac{600,000 \times 850,000}{(150,000+600,000)}	=	$680,000
Total		=	$850,000