Question

Samtech manufacturing purchased land and a building for $4 million. in addition to the purchase price, samtech made the following expenditures in connection with the purchase of the land and building:

title insurance $ 18,000
legal fees for drawing the contract 6,000
pro-rated property taxes for the period after acquisition 38,000
state transfer fees 4,200

an independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.6 and $1.2 million, respectively. shortly after acquisition, samtech spent $84,000 to construct a parking lot and $42,000 for landscaping. required: determine the initial valuation of each asset samtech acquired in these transactions.

Answer 1

To allocate the purchase price of Samtech's acquired assets, it's necessary to determine the percentage of the total cost attributed to the land and building based on their fair market values. The initial valuation of the land amounts to $3,148,200, and the building is valued at $1,044,000 after adding direct costs to the allocated purchase price.

Step-by-step explanation:

The initial valuation of each asset Samtech acquired in these transactions can be determined by allocating the total cost of $4 million between the land and the building based on their relative fair market values. The fair values given for land and building are $3.6 million and $1.2 million, respectively. The total fair value is $3.6 million + $1.2 million = $4.8 million.

To allocate the purchase price:

Calculate the percentage of total fair value attributed to each asset. For the land: $3.6 million / $4.8 million = 0.75 (or 75%). For the building: $1.2 million / $4.8 million = 0.25 (or 25%).

Multiply the total costs by these percentages. Land: $4 million x 0.75 = $3 million. Building: $4 million x 0.25 = $1 million.

Now add the costs that can directly be attributed to the assets. Land: $3 million + $18,000 (title insurance) + $4,200 (state transfer fees) + $84,000 (parking lot) + $42,000 (landscaping) = $3,148,200. Building: $1 million + $6,000 (legal fees) + $38,000 (pro-rated property taxes) = $1,044,000.

Therefore, the initial valuation of the land is $3,148,200 and the building is $1,044,000.