Basket (Lump-sum) Purchases - Video Tutorials & Practice Problems
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Basket (Lump-sum) Purchases
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sometimes we might buy a group of fixed assets together, we're gonna have to assign a cost to each of those fixed assets. So let's see what we do when we have these lump sum purchases? So these are usually called lump sum purchases? Sometimes you'll call them call see them called a basket purchase basket purchase of assets. Okay, And this is usually when we buy a lot of times it's going to be buying land with a building attached to it, right? You're buying land and a building. So you can't just say one account for land and building. No, we need to assign a cost to the land and assign the cost of the building. And this is especially important when we're dealing with land and building, right? Because land is not depreciated, but the building is right, The building, the building is depreciated. So if we don't get the initial cost of each of these correctly, well, the depreciation is going to be different, right? So we want to make sure we get this. Right. So the thing that happens here is that when we do a lump sum purchase, when we buy the land and the building or buy a bunch of assets together, we're generally going to get a discount, right? This is kind of like a wholesale kind of thing. We're buying a bunch of things, we're going to get a discount from the fair value of each asset separately. So if we had paid for the land by itself and then the building by itself, we would have paid the fair value for each, but since we're buying everything together we're gonna get some sort of slight discount. Right? So how do we uh arranged much goes to the land? How much goes to the building? Well we're gonna use what's called the relative sales value method. Okay. And it's this three step method that I've got right here. Okay so remember we're gonna pay some amount of cash and we're gonna have to split that up while it's to be cash. Maybe we'll sign a note payable or something. But whatever we're gonna pay some amount and we need to split up that amount that we paid between the different assets that we bought. Okay so here's the three step process. The first thing we need to do is find the total market value of what we purchased, right? Um So this could be how much was the land worth by itself? How much was the building worth by itself? We need to add all of those things together. That's the first step next. We need to find the percentage of the total fair market value for each asset purchase. So how much of that total market value was the land? How much of that total market value was the building Last. But not least. We need to take that percentage that we just calculated in step two. And we're gonna multiply it by the total amount that we actually paid right? Since we paid a little bit less we're gonna say, Okay since since the land was say 20% of the total value. Well that means that 20% of what we paid goes to the land. Okay. So let's go ahead and we'll do this example and we'll see how this relative sales value method works. So we've got by it all company, the biotech company purchased a plot of land with a building attached to it at a combined purchase price of $2.8 million. So that's what they paid for it. Right? They paid $2.8 million. The appraiser indicated that the fair market value of the land was $300,000 and the buildings. Fair market value was $2.7 million. So you can already see that we got a discount right? The building and the land were more than what we paid of 2.8 million. So what is the journal entry to record the combined purchase of the land and building? Well, let's go ahead and fill out this little table. It's gonna be an easy way to understand what we're doing, how we're doing our three steps and actually let me scroll up and keep those three steps on the screen right there. Cool. Alright, let's go ahead and do it. So let's start with each asset. Let's go ahead and label each one we had land and we had the building. Okay, so we had land in the building. So let's start with the fair market value of each. Right notice step one is telling us to find the total fair market value of what we purchased. So it tells us the land had a fair market value of 300,000. The building had a fair market value of 2.7 million. So what's the total fair market value? Well we gotta add those together. Right? 300,000 plus 2.7 million. That comes out to a total market value of three million. So that's what we purchased. Right? $3 million worth of stuff. And how much do we pay? We only paid 2.8 million. Okay so step one is done. This is the total fair market value. F. M. V. Stands for fair market value. So total fair market value was three million. So what was the percentage of the total fair market value for each? Well what we're gonna have to do is take the fair market value of each asset divided by the total. So let's do it for land first. For land its value was 300,000 Out of the three million. Alright so it was 300,000 out of the three million. Well how much is that? 300,000 divided by three million. That comes out to 10%. Right? 10%. It'll give you 0.1 as a percentage. That's 10%. And what about the building? Well the building was two million. 700,000 Out of the three million. Right. So, we're finding the percentage that each made up of that total fair market value. So, if the first one was 10% well, this one's obviously 90%. Right? But you can confirm that in your calculator, it comes out 2.9 90%. Alright, so that's step two. We found the percentage of the total fair market value that each one has. So what was the total payment made? Well, in both cases, this was the total payment. Right, Alright. So the initial cost of each asset? Well, we just have to multiply our percentage times the total payment made. So we're gonna multiply across here. So 10% times the 2.8 million. Well, that's gonna come out to 280,000. Right? Let me get out of the way here. So you see everything 10% times 2.8 million. So this is the math that we're doing right here. 10% times 2.8 million. That is 280,000. And that's gonna be the cost of the land. Notice the fair market value was 300,000, but it's only going to be on our books for 280,000 because that's essentially what we paid for it. Now, let's see what the building is worth the building is gonna be uh 90% times the 2.8 million. And that comes out to 2500 and 20,000. And notice if we add these two numbers together uh the 280,000 and the 2,000,000. , you add those together. And it comes out to our full payment of 2.8 million. Right? So there we go, that gives us what the initial cost of each one is. So let's go ahead and write down under here. Let's make the journal entry. I'll make it over here on the right hand side. So we had land, right? We're going to debit land because we received land and we're going to debit building because we received a building. And what are we gonna credit? What we paid with cash? So we're going to credit cash to get rid of the cash and what's gonna be the land? The land is gonna be 280,000. The building is gonna be 2,520,000. And the cash is 2,800,000 as a credit. Right? The actual amount that we paid. Well that's the cash that we have to get off of our books with the credit. So that's our journal entry right there, notice we use the fair market values to find the percentage of the total payment that we're going to put towards each asset. Alright, so now that you guys saw how to do a basket purchase. Why don't you guys try it in this next problem. Alright let's do it now
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Problem
The Cutting Corner paid $640,000 for a basket purchase of land, building, and equipment. At the time of the purchase, the land had a market value of $224,000, the building's market value was $455,000 and the equipment's market value was $21,000. If the business put $240,000 as a down payment while signing a note payable for the remainder of the $640,000 purchase price, what would be the journal entry to record the basket purchase?