Basket Purchase - Explained
What is a Basket Purchase?
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Table of ContentsWhat is a Basket Purchase?How does a Basket Purchase Work?Basket Purchase Allocation ExampleBasket Purchase of Similar Assets
What is a Basket Purchase?
A basket purchase is also called a lump sum acquisition, this is the purchase of many assets as a group. When an investor purchases a basket of assets, it means that in a single transaction, the investor is able to buy many assets as one group. This basket of purchase might also be different securities, equipment, property or facility purchased as a group.
The price of purchase of this group of assets is often below their combined market values, the total purchase price is one that has not been assigned to individual assets. Therefore, in most cases, the price quoted in basket purchase is below the price of the combined assets.
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How does a Basket Purchase Work?
Prices must be assigned to individual assets acquired in a basket purchase in order to correctly calculate the depreciation of each of the assess and also have an accurate business record. The estimated fair value of the assets is often above the total purchase price of the basket of assets. The basket purchase price can however be allocated to individual items using the percentage of their estimated fair market value. Purchase price can be assigned to individual assets acquired in a basket purchase using the example below;
Basket Purchase Allocation Example
For example, if a business purchases a basket of assets containing property, plant and equipment at a total price of 35,000 which has not been attributed to individual assets. Assuming the estimated fair value of the individual assets is; Asset Value % Property 23,000 46% Plant 12,000 24% Equipment 15,000 30% Total 50,000 100% Then the basket purchase price will be allocated according to the percentage of individual estimated fair value as seen below; Asset Value Property 16,100 (46%) Plant 8,400 (24%) Equipment 10,500 (30%) Total 35,000 (100%). It is however important to note that this example is for a basket of purchase containing different types of assets. An example of price allocation for a basket of purchase containing similar assets will be shown below.
Basket Purchase of Similar Assets
The basket purchase price allocation used in the above example is also applicable for a basket of purchase of similar assets. For instance, price allocation for a basket of purchase that contains similar equipment or machinery can be estimated as follows; If three equipment with an estimated fair market value of 40,000 are acquired as a basket of purchase with a total price of 15,000 the allocation of the basket price would appear as follows: Asset Value Equipment A 20,000 (50%) Equipment B 12,000 (30%) Equipment C 8,000 (20%) Total 40,000 (100%) Then, the price of individual equipment will be allocated based on the same percentage they have in their estimated fair market value. The allocation would then be; Equipment A 7,500 (50%) Equipment B 4,500 (30%) Equipment C 3,000 (20%) Total 15,000 (100%).
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