A basket purchase or lump sum acquisition of long term assets refers to the purchase by a business of a group (basket) of assets, including property, plant and equipment, for a total purchase price which has not been attributed to the 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 purchase price to the individual assets acquired.
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:
| Asset | Value | % |
|---|---|---|
| Property | 23,000 | 46% |
| Plant | 12,000 | 24% |
| Equipment | 15,000 | 30% |
| Total | 50,000 | 100% |
Clearly the total value of the individual assets (50,000) is greater than the purchase price paid (35,000).
The purchase price of 35,000 is now allocated in proportion to the value of the assets.
| Asset | Value | % |
|---|---|---|
| Property | 46% | 16,100 |
| Plant | 24% | 8,400 |
| Equipment | 30% | 10,500 |
| Total | 100% | 35,000 |
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.
| Account | Debit | Credit |
|---|---|---|
| Property | 16,100 | |
| Plant | 8,400 | |
| Equipment | 10,500 | |
| Cash | 35,000 | |
| Total | 35,000 | 35,000 |
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.
For example, the business might have purchased three manufacturing machines for 15,000 with fair values of 20,000, 12,000 and 8,000 receptively.
Using the same techniques the allocation of the basket price would appear as follows:
Estimate Fair Market Value
Firstly estimate the fair market value of the individual assets.
| Asset | Value | % |
|---|---|---|
| Machine A | 20,000 | 50% |
| Machine B | 12,000 | 30% |
| Machine C | 8,000 | 20% |
| Total | 40,000 | 100% |
Allocate the Total Basket Price
Secondly allocate the total price in proportion to the fair market value of the individual assets.
| Asset | % | Value |
|---|---|---|
| Machine A | 50% | 7,500 |
| Machine B | 30% | 4,500 |
| Machine C | 20% | 8,000 |
| Total | 100% | 15,000 |
Journal Entry the Allocation
Finally record the purchase with the following journal entry.
| Account | Debit | Credit |
|---|---|---|
| Machine A | 7,500 | |
| Machine B | 4,500 | |
| Machine C | 3,000 | |
| Cash | 15,000 | |
| Total | 15,000 | 15,000 |
Conclusion
In conclusion the basket purchase allocation refers to the process of allocating the cost of a group of assets purchased together as a single unit, known as a “basket.” This allocation process is important because each asset within the basket has a different useful life, depreciation rate, and salvage value, and therefore, should be assigned a proportionate amount of the total cost based on its relative value. The proportional allocation method is the most straightforward method, where the cost of the basket is allocated to each asset based on its percentage of the total fair market value.
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. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.