What is a Lump-Sum Purchase?

A lump-sum purchase occurs when several assets are acquired for a single price. Each of the assets must be recorded separately as a fixed asset in the accounting records; this is because assets have different useful lives and may have different depreciation methods applied to them, while some assets may not be depreciated at all. This means that the purchase price must be allocated among the various acquired assets based on their fair market values. This situation most commonly arises when property is purchased and the purchase price includes both land and structures.

Example of a Lump-Sum Purchase

A buyer acquires property for $1,000,000. The property includes land with a market value of $250,000 and a building with a market value of $800,000. The apportionment of the lump-sum purchase price to these assets is calculated as follows:

Land: (($250,000/($250,000+$800,000)) x $1,000,000 = $238,095
Building: (($800,000/$250,000+$800,000) x $1,000,000 = $761,905