Question

Semtech Manufacturing purchased land and building for $5 million. In addition to the purchase price, Semtech made the following expenditures in connection with the purchase of the land and building:

Title insurance $ 24,000 Legal fees for drawing the contract 9,000 Pro-rated property taxes for the period after acquisition 44,000 State transfer fees 4,800
An independent appraisal estimated the fair values of the land and building, if purchased separately, at $4.2 and $1.8 million, respectively. Shortly after acquisition, Samtech spent $90,000 to construct a parking lot and $48,000 for landscaping.
1. Determine the initial valuation of each asset Semtech acquired in these transactions.
2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Semtech demolished the building. Demolition costs were $330,000 and the salvaged materials were sold for $5,000. In addition, Semtech spent $87,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

Semtech Manufacturing

1. Initial valuation of each asset:

Land = $3,526,460

Building = $1,511,340

2. The initial valuation of land = $5,449,800

Step-by-step explanation:

a) Data and Calculations:

Cost of purchased land and building = $5 million

Additional expenditures:

Title insurance $ 24,000

Legal fees for drawing the contract 9,000

Prorated property taxes for the period after acquisition 44,000

State transfer fees 4,800

Allowed additional costs:

Title insurance $ 24,000

Legal fees for

drawing the contract 9,000

State transfer fees 4,800

Total additional costs $37,800

Total expenditure on the land and building = $5.037.8 million

Initial valuation of each asset:

Land = $3,526,460 ($5,037,800 * $4,200,000/$6,000,000)

Building = $1,511,340 ($5,037,800 * $1,800,000/$6,000,000)

Cost of land after the demolition of the building:

Initial purchase cost of land and building = $5 million

Additional cost = $37,800

Demolition costs = $330,000

Salvage of materials ($5,000)

Clearing and grading land = $87,000

Total cost of land = $5,449,800