ACCOUNTING FOR PURCHASE OF FIXED ASSETS- www.accacoach.com

ACCOUNTING FOR PURCHASE OF FIXED ASSETS

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Lump-sum Purchase of Fixed Assets means the purchase of different types of fixed assets, such as real estate, factories, and equipment in exchange for a single payment. Lump-sum purchase of fixed assets is very common because fixed assets (such as land, machinery, and equipment) are usually added and inseparable.

The accounting standard like the International Financial Reporting Standard (IFRS) and US GAAP (Generally Accepted Accounting Principle) requires certain disclosure of different classes of fixed assets separately. Therefore, a single payment for the entire batch means that the actual purchase value of each component of the purchased asset cannot be obtained. In this case, the accountant must allocate the amount paid in proportion to the fair value of the purchased assets.

Formula 

The lump sum purchased of fixed assets are therefore recorded at a value calculated using the following formula:

Value of Assets = Fair value of the Asset divided by Fair Value of all the Assets Purchased multiply by Lump sum Paid

Alternatively, the fair value of the asset relative to the fair value of the assets purchased against lump-sum which may be expressed in percentage. The percentage figures when multiplied by the lump-sum paid will return the value at which the asset should be recorded. The example are shown below:

Example of Lump sum Fixed Assets

ABC purchased a factory for lump-sum of $300,000 paid via bank. The purchase of each component of the fair value are given below:

 Land               22,000

Building          28,000

Equipment       224,000

Required: Calculate the sum at which each of the above components shall be recognized on purchase date and record the purchase transaction.

                Fair Value            % of total FV      Recognition Value

Land      22,000   11.00%  33,000

Building                28,000   8.0%      36,000

Equipment          224,000 81.0%    231,000

Total      274,000 100.0%  300,000

The journal entry are passed to record the lump sum purchase are as follows:

Land      22,000  

Building                28,000  

Equipment          224,000

            Cash at Bank                         274,000

Example

A buyer acquired the property for $500,000. The property includes land with a market value of $200,000 and a building with a market value of $400,000. The allotment of the lump-sum purchase price to these assets is calculated as follows:

Land (($200,000//($200,000+$400,000))*$500,000 = $166,666

Building (($400,000/$200,000+$400,000)*$500,000=$333,333

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