Sometimes we might buy a group of fixed assets together. We're going to 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. These are usually called lump sum purchases. Sometimes you'll see them called a 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 a cost to 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 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 are buying everything together, we are going to get some sort of slight discount. Right? So how do we arrange how much goes to the land, how much goes to the building? Well, we're going to use what's called the relative sales value method. Okay? It's this 3 step method that I've got right here. Okay? So remember, we're going to pay some amount of cash and we're going to have to split that up. Well, it could be cash or maybe we'll sign a note payable or something. But whatever. We're going to 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 3 step process. The first thing we need to do is find the total market value of what we purchased, right? 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 2 and we're going to multiply it by the total amount that we actually paid since we paid a little bit less. We're going to say, okay 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 Buy It All Company. The Buy It All Company purchased a plot of land with a building dollars So that's what they paid for it, right? They paid 2.8 $1,000,000 The appraiser indicated that the fair market value of the land was $300,000 and the building's fair market value was $2,700,000 So you could already see that. We got a discount, right? The building and the land were more than what we paid of 2,800,000. 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 going to be an easy way to understand what we're doing, how we're doing our 3 steps. And actually, let me scroll up and keep those 3 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 and the building. So let's start with the fair market value of each, right? Notice step 1 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 point 7,000,000. So what's the total fair market value? Well, we got to add those together, right? 300,000 plus 2,700,000 that comes out to a total market value of 3,000,000. So that's what we purchased, right? $3,000,000 worth of stuff and how much did we pay? We only paid 2,800,000. Okay? So step 1 is done. This is the total fair market value. FMV stands for fair market value. So total fair market value was 3,000,000. So what was the percentage of the total fair market value for each? Well, what we're going to 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 3,000,000, alright? So it was 300,000 out of the 3,000,000. Well, how much is that? 300,000 divided by 3,000,000 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 2,700,000 out of the 3,000,000, 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 to 0.9, 90%. Alright? So that's step 2. 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? All right. So the initial cost of each asset, well we just have to multiply our percentage times the total payment made. So we're going to multiply across here. So 10% times the 2,800,000. Well, that's going to come out to 280,000, right? Let me get out of the way here so you see everything. 10% times 2,800,000, so this is the math that we're doing right here. 10% times 2,800,000, that is 280,000 and that's going to be the cost of the land. Notice the fair market value was 300,000 but it's only gonna be on our books for 280,000 because that's essentially what we paid for it. Now let's see what the building's worth. The building is gonna be 90% times at 2,800,000 and that comes out to 2,520,000. And notice if we add these two numbers together, the the 280,000 and the 2,520,000, you add those together and it comes out to our full payment of 2,800,000, 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 gonna debit land because we received land, and we're gonna debit building because we received a building. And what are we gonna credit? Well, we paid with cash so we're going to credit cash to get rid of the cash and what's going to be the land? The land is going to 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 gonna 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.
8. Long Lived Assets
Basket (Lump-sum) Purchases
8. Long Lived Assets
Basket (Lump-sum) Purchases - Online Tutor, Practice Problems & Exam Prep
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Basket (Lump-sum) Purchases
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ProblemThe 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?
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