Question

Samtech Manufacturing purchased land and building for $3 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building: Title insurance$23,000 Legal fees for drawing the contract 8,500 Pro-rated property taxes for the period after acquisition 43,000 State transfer fees 4,700 An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3 and $2 million, respectively. Shortly after acquisition, Samtech spent $89,000 to construct a parking lot and $47,000 for landscaping. Required:1. Determine the initial valuation of each asset Samtech acquired in these transactions.2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $320,000 and the salvaged materials were sold for $9,500. In addition, Samtech spent $86,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

1. We have:

Initial valuation of land = $1,821,720

Initial valuation of building = $1,214,480

2. We have:

Initial valuation of land = $3,432,700

Initial valuation of building = $0

Step-by-step explanation:

1. Determine the initial valuation of each asset Samtech acquired in these transactions.

Fair value of land = $3 million

Fair value of building = $2 million

Total fair value = $3 million + 2 million = $5 million

Total acquisition cost = Purchase price land and building + Title insurance + Legal fees for drawing the contract + State transfer fees = $3,000,000 + $23,000 + $8,500 + $4,700 = $3,036,200

Initial valuation of land = Total acquisition cost * (Fair value of land / Total fair value) = $3,036,200 * (3 / 5) = $1,821,720

Initial valuation of building = Total acquisition cost * (Fair value of building / Total fair value) = $3,036,200 * (2 / 5) = $1,214,480

2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $320,000 and the salvaged materials were sold for $9,500. In addition, Samtech spent $86,000 clearing and grading the land in preparation for the construction of a new building.

Since it is assumed that the building has been demolished, the building will no longer have any initial valuation or an initial valuation of $0.

What will happen now is that the Total acquisition cost plus Demolition costs and cost of clearing and grading the land in preparation for the construction of a new building minus the salvaged materials will be the initial valuation of land.

Initial valuation of land = Total acquisition cost + Demolition costs + Cost of clearing and grading the land - Salvaged materials = $3,036,200 + $320,000 + $86,000 - $9,500 = $3,432,700

Initial valuation of building = $0