Basket Purchase

A basket purchase in accounting is a single transaction in which multiple assets are bought at a rate below their combined market values. The company determines the proportion of the purchase price to attribute to each asset class based on the appraised values of the assets.

It is significant since it is convenient and economical. When buying items in bulk, buyers can often bargain for a lower cost than when purchasing each item separately. It may lead to lower expenses and more efficient procurement procedures. Furthermore, a basket buy can guarantee that all required assets are obtained simultaneously, preventing any delays or compatibility problems.

A basket purchase in accounting, also known as a lump-sum purchase, is a financial transaction where multiple assets are acquired for a combined price. This is common when a business acquires a group of assets from another company or during business acquisition. The assets may consist of equipment machinery, or intangible assets. The total purchase price is allocated among the assets based on their fair market values, which determines the cost basis for amortization, depreciation, and the calculation of gains or losses upon asset disposal.

It is a business's purchase of a group of long-term assets, such as property, plants, or equipment. The total purchase price is often less than the asset's estimated fair value. Allocating the cost of collection of assets that are acquired together as a single unit is referred to as basket buy allocation. The asset in the basket has varied useful life, salvage value and depreciation rate; as a result, it should be allocated a proportionate share of the overall cost based on its relative value. This makes the allocation procedure important.

The simplest approach to attain this is the proportional allocation method. It assigns the cost of the basket to each asset according to its share of the overall fair market value. This helps in accurately displaying the assets in the business's records and allowing accurate depreciation calculations.

Financial reporting and accounting requirements depend on the purchase cost allocations of the basket. It guarantees the accurate and fair valuation of assets as shown on the balance sheet. When managers are able to evaluate the specific costs and advantages of every item in the basket, it facilitates decision-making.

Finding the fair market value or relative market values of the included assets is a necessary step in calculating the basket purchase allocation. Expert opinions, market research, and assessments can all be used to determine this. Each item is then given the allotted cost according to its relative worth in the basket. There is no basket purchase formula.

Let us look into a few examples to understand the concept better.

Example #1

Suppose XYZ Ltd., a clothing company, is planning to expand its operations and increase production capacity by purchasing various equipment for its new facility. They decide to explore a basket purchase option, which involves a supplier offering a bundled package of sewing machines, cutting tables, and fabric inspection equipment at a significantly lower price than the sum of individual prices. XYZ Ltd. evaluates the assets and ensures they meet their quality and performance standards. By opting for a basket purchase, XYZ Ltd. acquires all necessary assets for their expansion and benefits from cost savings compared to individual purchases. This allows them to accurately record the value of each asset on their balance sheet and make informed decisions regarding maintenance, utilization, and potential upgrades in the future.

Example #2

Suppose Debby, the owner of a furniture manufacturing company, decides to acquire the assets of another teak wood furniture manufacturing company called ABC Ltd. The total cost of the acquisition is $200,000. However, the assets of ABC Ltd have a total fair value of $300,000, and basket purchase allocation is as follows:

• Asset A = $120,000 (40% of total fair value)
• Asset B = $100,000 (33.33% of total fair value)
• Asset C = $80,000 (26.67% of total fair value)

To allocate the purchase cost proportionally, Debby applies the same percentages to the $200,000 purchase price as there is no single basket purchase formula:

• Plant = $80,000 (40% of the $200,000 purchase price)
• Equipment = $66,667 (33.33% of the $200,000 purchase price)
• Building = $53,333 (26.67% of the $200,000 purchase price)

So, in Debby's fixed asset register, the costs recognized for each asset are as follows:

• Plant = $80,000
• Equipment = $66,667
• Building = $53,333

These amounts reflect the proportional allocation of the purchase price based on the fair values of the assets acquired from ABC Ltd.