Basket Purchase
A basket purchase is a transaction in which multiple fixed assets are purchased together. If the cost can’t be assigned, it is allocated to the assets based on their appraised value.
One reason for basket purchase is when the price quoted in basket purchase is lower than the price charged for individual assets. In many cases, buildings are purchased together with land without agreeing on the cost of land and cost of building separately. Other instances involving basket purchase include acquisition of a whole division or manufacturing facility of one company by another.
The following steps are involved in accounting for a basket purchase:
- Identify the consideration paid for the basket purchase.
- Identify the assets being acquired and their quantities.
- Assign the costs which can directly assigned to specific assets.
- Find out the appraised values of whose cost is not specifically identified in the transaction
- Allocated the remaining payment to the remaining assets in proportion of their appraised values.
Example
Karakorum, Inc., a manufacturer of sports equipment, is in financial distress and has decided to sell off its golf division to Himalaya, Inc. for $40 million. The following table lists the division’s assets:
| Assets | Appraisal Value |
|---|---|
| Land | $10 million |
| Buildings | $5 million |
| Machinery | $22 million |
| Office equipment | $2 million |
| Furniture and fittings | $1 million |
| Intangible assets | $7 million |
Himalaya, Inc. paid the fair value for intangible assets but due to the forced sale nature of the transaction, it was able to pay a lower price for other assets.
Because the cost paid for intangible asset is $7 million which is exactly equal to its fair value, this cost is directly assigned to intangible assets and the remaining purchase consideration paid is allocated to the remaining assets in proportion of their appraisal value.
The following table shows the assignment and allocation of cost:
| USD in million | Fair Value | Direct Allocation | Percentage | Cost Allocated |
|---|---|---|---|---|
| Land | 10 | 25% | 8.25 | |
| Buildings | 5 | 13% | 4.125 | |
| Machinery | 22 | 55% | 18.15 | |
| Office equipment | 2 | 5% | 1.65 | |
| Furniture and fittings | 1 | 3% | 0.825 | |
| Sub-total | 40 | 33 | 100% | 33 |
| Intangible assets | 7 | 7 | 7 | |
| Total | 47 | 40 | 40 |
The following journal entry needs to be passed to record the basket purchase:
| Land | $8.25 million | |
| Buildings | 4.125 million | |
| Machinery | 18.15 million | |
| Office equipment | 1.65 million | |
| Furniture and fittings | 0.825 million | |
| Intangible assets | 7 million | |
| Cash | $40 million |
by Obaidullah Jan, ACA, CFA and last modified on