When multiple assets are acquired in one transaction it is called a basket purchase. For instance Uncle Joe might buy an equipment and as a bonus, the seller throws in some furniture. To record the purchase in his books, Uncle Joe would have to allocate the cost between the furniture and the equipment. To allocate the respective cost, Uncle Joe would have to use the relative fair market value method.
Using our example from above, if Uncle Joe paid $10,000 for the equipment and furniture, Uncle Joe will have to use the relative fair market value method as follows:
- Figure out the fair market value (this is the price each item will sell in the open market)
- Allocate the amount paid between all items in the basket purchase using their relative fair market value
If the fair market value of the furniture is $3,000 and the fair market value of the equipment is $10,000, use the fair market value method to allocate costs
First, find the percentage of fair market value
| Equipment | 10,000 | 77% |
| Furniture | 3,000 | 23% |
| Total costs | 13,000 | 100% |
Second, use the relative percentage to allocate the cost:
| Equipment | 77% * 10,000 | 7,700 |
| Furniture | 23% * 10,000 | 2,300 |
| 10,000 | ||