Q5RQ - Horngren'S Financial And Managerial Accounting

Question

Question: What is a lump-sum purchase, and how is it accounted for?

Step-by-Step Solution

Answer

Answer

A scenario in which several assets are purchased simultaneously by paying a single price and accounted as assets are debited, and cash or Notes payable are credited.

Step 1: Meaning of Relative-Market-Value-Method

The relative-market-value method means dividing the total lump-sum purchase cost among the assets purchased in lump-sum according to their respective market value.

Step 2: Detailed explanation on lump-sum purchase and its accounting treatment

Sometimes a company purchases several assets like Land and buildings by paying a single price. It is known as Lump-sum-purchase. It is also known as Basket Purchase.

The accounting treatment of lump-sum-purchase is that each asset is debited with that amount, calculated by allocating the total purchase cost among the acquired asset's market value. The Cash or Notes payable is credited with the lump-sum purchase price.