Lump-sum Purchase of Fixed Assets
Lump-sum purchase of fixed assets refers to purchase of different classes of fixed assets such as property, plant and equipment in exchange for a single sum paid. Lump-sum purchases of fixed assets are common because fixed assets such as land, machinery and equipment are usually attached and inseparable.
Accounting standards require disclosure of different classes of fixed assets separately. However, the payment of single sum of money for the whole lot means that actual purchase value of each component of assets purchased is not available. In such cases the accountant must distribute the sum paid among the assets purchased in the ratio of their fair values.
Fixed assets purchased for lump-sum are therefore recorded at a value calculated using the following formula:
|Value of Asset =||Fair Value of the Asset||× Lumpsum Paid|
|Fair Value of all the Assets Purchased|
Alternatively the fair value of the asset relative to the total fair value of the assets purchased against lump-sum may be expressed in percentage. Those percentage figures when multiplied by the lump-sum paid will return the value at which the asset should be recorded. This is demonstrated in the example given below.
TPI purchased a factory for lump-sum of $500,000 paid via bank. The fair value of each of component of the purchase is given below:
Required: Calculate the amount 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|
The journal entry to record the lump-sum purchase shall be:
|Cash at Bank||500,000|
Written by Irfanullah Jan