Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Sign up and see all textbooks for free! Illustration

Q5RQ

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 525

Answers without the blur.

Just sign up for free and you're in.

Illustration

Short Answer

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

Lump-sum purchase is the purchasing of assets in the groups. The accounting for this type of purchase is based on the relative-market-value method.

See the step by step solution

Step by Step Solution

Step 1: lump Sum Purchase

Lump-sum purchase is a kind of basket purchase in which several assets are purchased in a group and payment is made in a lump sum for all assets in the group.

Thus the lump sum price represents the group of assets cost and not the individual asset cost.

Step 2: Accounting for lump-sum purchase

Lump-sum purchase is accounted for based on the relative-market-value method.

Under this method, the total cost of the group asset is divided according to their relative market value.

For example, the lump sum amount for a group of two assets is $10,00,000 and the relative market value for asset one is $700,000 and for the second asset is $500,000. So the $10,000,000 would be allocated based on the relative value of both assets.

Asset one would be allocated 58% and second asset would be allocated 42% respectively.

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.