Question

12. Explain the process of allocating cost to the various individual assets involved in a lump sum/basket purchase. (When multiple assets are purchased at the single purchased price)

Thank you!!

Answer 1

• The process of allocation lumpsum cost paid to acquire multiple asset to individual assets:

>Step 1: Assign a fair value/market value to each of the individual asset.
>Step 2: Total those fair values and for each individual asset, calculate the percentage amount of that asset’s fair value to the total of fair values.
>Step 3: Multiply the lumpsum amount by the percentage calculated in Step 3.

• The following example will ease things out.
  Example: $ 60,000 is paid to acquire Land, Building and Equipment.
  A valuer is appointed who assigned the following appraised fair values [Step 1]
  Land = $ 30000, Building $ 18000, Equipment $ 27000

Step 2 and Step 3:

Allocation of Total Cost	Appriased Value	% of total appraised value	Total cost of acquisition	Apportioned Cost = Step 3
	[A]	[B]	[C]	[D = B x C]
Land	$                             30,000.00	40.0%	$                     60,000.00	$                                        24,000.00
Building	$                             18,000.00	24.0%	$                     60,000.00	$                                        14,400.00
Equipment	$                             27,000.00	36.0%	$                     60,000.00	$                                        21,600.00
Total	$                             75,000.00	100%		$                                        60,000.00