Acquisition of Multiple Assets Together

true-tamplin_2x_mam3b7

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 14, 2023

Definition and Explanation

Since almost every type of asset can be viewed as a set of components, there are very few situations in which a single asset is acquired.

In many (if not most) cases, this fact is ignored because the components are either permanently joined together, share the same useful life, or information about the separate components is not relevant.

However, in other cases, it may be useful to recognize the separate parts of an asset in order to determine and report the cost of using each part over the course of their unique service lifetimes.

To accomplish this separation, it is necessary to allocate the cost of the package of assets among the separate items in accordance with some logical allocation basis.

Example

Suppose that an existing factory is purchased for a single sum of $640,000. This price includes the land deed, a building, and the equipment in the building.

To calculate depreciation, it is necessary to subdivide the $640,000 across the three main items. A widely used reasonable allocation basis is the assets' relative market values.

Assume that a pre-purchase appraisal worked out the following market values for the respective assets if purchased separately:

  • $87,500 for the land
  • $175,000 for the building
  • $437,500 for the equipment

The total cost would be allocated in accordance with the following schedule:

Cost Allocation After Acquisition of Multiple Assets Together

If the total cost exceeds the total market value of the identifiable assets when an entire company is being purchased, there is evidence that goodwill exists, and this allocation procedure should not be used.

Acquisition of Multiple Assets Together FAQs

true-tamplin_2x_mam3b7

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.