From the course: Accounting Foundations: Asset Impairment
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A basket purchase
From the course: Accounting Foundations: Asset Impairment
A basket purchase
- Property, plant and equipment items are often purchased together in a group rather than separately, one-by-one. Accountants call this a basket purchase. In a basket purchase, the total purchase price for the group of assets must be allocated to each of the separate assets in the group according to their relative estimated values. For example, when an existing building is purchased, the land on which that building is situated usually is purchased also. The agreed-upon purchase price represents the total cost of both the building and the land, and in many cases the total purchase price is more or less than the fair market values of the building and the land individually. Now, why would that be? Because the total purchase price is an exact number, but the market values of the individual components of the basket purchase are estimates. For example, think of buying a house, simple enough. When buying this house, you bought…
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