What does the method of basket or lump sum purchases require?

The method of basket or lump sum purchases necessitates the allocation of the total purchase price among the individual assets acquired based on their relative fair market values. When assets are purchased together as a group, the total amount paid does not directly correlate to the individual asset values. Instead, it is critical to assess the fair market values of each asset to fairly allocate the combined purchase price.

This approach ensures that each asset is recorded in the accounting records at a value that reflects its actual worth, promoting an accurate financial representation of the assets owned. This allocation process is important for future depreciation calculations and financial reporting. In scenarios where multiple assets are purchased together, such as land and buildings or equipment, applying this method helps maintain compliance with accounting principles by accurately reflecting the value of each asset on the balance sheet.