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Basket Purchases
A basket purchase is a purchase of multiple assets for a single price. The company must determine based on the appraised values of the assets how much of the purchase price they should attribute to each asset class.
Steps to Determine Acquisition Cost
- Using the appraised values of the assets, determine the ratio of each asset to the total. Example: The appraised values of the building and land are $900,000 and $300,000 respectively.
- Separate costs related to the entire purchase from costs related to specific assets. Example: Purchased a building and land for $1,000,000. Spent an additional $12,000 on closing fees; $5,000 on the land transfer tax and $10,000 to repair several broken windows.
- Allocate the costs from step 2 using the ratios from step 1.
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Example: Basket Purchases
Wize Fitness Center recently purchased three exercise machines from a competitor that was going bankrupt. Given that the machines were very different, the company accounted for them in separate accounts, Machine A; Machine B; Machine C. Wize paid $51,000 in cash for the three machines, as well as $1,000 to a moving company to deliver them. Upon receiving the machines, management realized that some parts were missing and that the cost to bring the machines to workable form would be $1,200, $2,300 and $2,450 for Machines A, B and C respectively.
Determine the acquisition cost of each machine if the appraised values of the machines at the time of purchase were $14,450; $21,675 and $36,125 for Machines A, B and C respectively.
Practice: Basket Purchases
KG Corp. purchased a new property in New York City to move its headquarter to, paying $1,200,000 in cash for the land and building. The appraised value of the assets at the time of the purchase was $340,000 for the land and $1,062,500 for the building. The company had hired a realtor to find the property, and will pay a $40,000 commissions once the transaction is closed. Legal fees to finalize the sale amount to $5,000, paid for by the seller, and the building needed renovations totalling $75,000 before it could be put in use. The state of New York charges a land transfer tax whenever land is sold, this cost KG Corp. $3,400 and was paid for at the time of the purchase.
Do not round your work, round final answers to the nearest dollar.