Question

Why is the cost of a lump-sum purchase allocated to the individual assets acquired?

Short answer

The cost of a lump-sum purchase allocated to the individual assets is acquired to ascertain the purchase cost of individual items.

Step-by-step solution

Lump-sum purchase

Sometimes Plant assets are purchased as a group in a single transaction for a lump-sum price. This transaction is called a lump-sum purchase, group, bulk, or basket purchase. When this occurs, we allocate the cost of the purchase among the different types of assets acquired based on their relative market values, which are estimated by appraisal or by using the tax-assessed valuations of the assets

Example of lump-sum purchase

ABC ltd. purchased a group of items consisting of a building appraised at $120,000 and land appraised at $80,000. The $180,000 cost is allocated based on appraised values as shown below:

	Appraised value	Percentage of total	Apportioned cost
Building	$120,000	60%	$108,000
Land	$80,000	40%	$72,000
total	$200,000	100%	$180,000