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.
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:
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:
Cash at Bank 274,000
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