Acquisition cost – definition and example

Acquisition cost definition

Generally the cost of invoice or payment made to the supplier for purchasing the asset considered as acquisition cost. In accounting, however, all the cost incurred to bring the assets in the business location and other expenditures which are incurred in order to set of the assets are also treated as acquisition cost. Therefore, acquisition cost includes invoice price, cost and other expenses such as a carriage, customs duty, vat, insurance charges during transportation, erection charge, etc.

Group Purchase

Sometimes a company may pay a single sum of money to purchase the group of assets. However, in journal entries, each asset should be recorded separately at their cost price. It is possible to calculate individual assets cost price by using the ratio between the total sum payment and fair market value of the assets.

This process includes the following steps:

• Calculate the total fair market value of all the assets purchased.
• Calculate the ratio of each individual assets market value. Where Individual asset market value = Individual assets market value/ total market value
• Multiply the above calculate ratio by the total lump sum payment.

For example:

A Company purchase land, building, and equipment at Rs. 20,50,000. The fair market value (FMV) of land, building, and equipment are respectively Rs. 20,00,000, Rs. 15,00,000, and Rs. 500,000.

Required: Calculate the acquisition cost of each asset and prepare a journal entry of assets purchased.

Solution:

Calculation of total fair market value (FMV)

Land Building Equipment	Rs. 20,00,000 Rs. 15,00,000 Rs. 5,00,000
Total	Rs 40,00,000

Calculation of FMV ratio

Land = 20,00,000 / 40,00,000 = 50%

Building = 15,00,000 / 40,00,000 = 37.5%

Equipment = 5,00,000 / 40,00,000 = 12.5%

Now,

Acquisition costs are:

We have,

Acquisition cost of land = Rs. 20,50,000 × 0.50 = Rs. 10,25,000

Acquisition cost of building = Rs. 20,50,000 × 0.375 = Rs. 7,68,750

And, for equipment = Rs. 20,50,000 × 0.125 = Rs. 2,56,250

Now,

Journal entry

Land a/c Dr.      Rs. 10,25,000

Building a/c Dr. Rs. 768,750

Equipment a/c Dr. Rs. 256,250

Cash a/c                              Rs. 20,50,000

(To record the purchase of assets)

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