Question

Rembson Manufacturing purchased land and building for $2 million. In addition to the purchase price, Rembson made the following expenditures in connection with the purchase of the land and building: Title insurance $12,000 Legal fees for drawing the contract 3,000 Pro-rated property taxes for the period after acquisition 23,000 State transfer fees 2,200 An independent appraisal estimated the fair values of the land and building, if purchased separately, at $1.8 and $0.9 million, respectively. Shortly after acquisition, Rembson spent $67,000 to construct a parking lot and $32,000 for landscaping. Required: 1. Determine the initial valuation of each asset Rembson acquired in these transactions. 2. Repeat requirement 1, assuming that immediately after acquisition, Rembson demolished the building. Demolition costs were $990,000 and the salvaged materials were sold for $4,600. In addition, Rembson spent $64,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

1.

	Land	Building	Land Improvements
Purchase price	$ 1333,333	$ 666,667
Title insurance	12,000
Legal fees for drawing the contract	2,000	1,000
Landscaping	32,000
Parking lot			$ 67,000
Initial Valuation	$ 1,379,333	$ 667,667	$ 67,000

2.

	Land	Building	Land Improvements
Purchase price	$ 1,333,333	$ 666,667
Title insurance	12,000
Legal fees for drawing the contract	2,000	1,000
Landscaping	32,000
Parking lot			$ 67,000
Demolition cost, net of salvage value		985,400
Clearing and grading		64,000
Initial Valuation	$ 1,379,333	$ 1,717,067	$ 67,000