Lump-Sum Purchases Businesses frequently purchase a number of assets with different physical characteristics at the same time. A common example of such a transaction is a real estate purchase. Assume that a company is purchasing a small office building. The purchase price of the property includes the land on which the building is situated, the building itself, and additional items such as a paved parking area and exterior lighting. For accounting purposes, the cost of the property should be divided into three accounts: Land, Building, and Land Improvements. In this case, land improvements include the parking area and the exterior lights. Other common land improvements include fences, signs, drainage structures, and landscaping. Real estate is frequently acquired by paying a single price for the entire property. For example, assume that the purchase price of the office building mentioned above was $500,000. To account for the transaction properly, the purchaser must allocate the purchase price to the three accounts: Land, Buildings, and Land Improvements. Suppose that a recent appraisal of the property indicated that the land was worth $60,000, the building was worth $510,000, and the land improvements were worth $30,000. Consequently, the total appraised value of the property is $600,000 even though the company was able to purchase it for $500,000. The appraised values are used to allocate the purchase price to the appropriate accounts in the following manner: Assuming cash was used to acquire the property, the general journal entry to record this transaction is: Transactions involving the purchase of several types of assets are sometimes referred to as lump-sum purchases or basket purchases. The same allocation procedures may be followed any time a group of assets is purchased in a single transaction. An exception to the allocation rule that should be kept in mind is that no asset should have a recorded cost that is greater than its fair market value. The fair market value of an asset is the price for which it could be purchased or sold under normal conditions. If the allocated portion of the purchase price of a particular asset is more than the asset's value, the fair market value of the asset should be recorded as its cost and a loss account should be debited for the difference between the purchase price and the fair market value of the asset.