Question

Terrabyte Corporation purchased land as a factory site and contracted with Mordor Construction to construct a factory. Terrabyte made the following expenditures related to the acquisition of the land, building, and equipment to equip the factory: Purchase price of the land Demolition and removal of old building Clearing and grading the land before construction Various closing costs in connection with acquiring the land Architect's fee for the plans for the new building Payments to Mordor for building construction Equipment purchased Freight charges on equipment Trees, plants, and other landscaping Installation of a sprinkler system for the landscaping Cost to build special platforms and install wiring for the equipment Cost of trial runs to ensure proper installation of the equipment Fire and theft insurance on the factory for the first year of use $1,300,000 80,000 151,000 32,000 57,000 3,170,000 854,000 40,000 42,000 9,000 27,000 9,000 17,000 In addition to the above expenditures, Terrabyte purchased four forklifts from Greenstone. In payment, Terrabyte paid $12,000 cash and signed a noninterest-bearing note requiring the payment of $76,000 in 4 years. An interest rate of 9% properly reflects the time value of money for this type of loan. Required: Determine the initial valuation of each of the assets Terrabyte acquired in the above transactions.

Answer 1

Assets	Intial Valuations
Land	$ 1,593,000
Building	$ 3,227,000
Machinery	$    930,000
Land improvements	$      51,000
Fork lifts	$      65,840
Prepaid insurance	$      17,000
Land:
Purchase price	$ 1,330,000
Demolition and removal of old building	$      80,000
Clearing and grading	$    151,000
Closing costs	$      32,000
Total cost of the land	$ 1,593,000
Building:
Architect's fees	$      57,000
Construction costs	$ 3,170,000
Total cost of the building	$ 3,227,000
Machinery:
Purchase Price	$    854,000
Freight Charges	$      40,000
Special platforms and wire installation	$      27,000
Cost of trial runs	$        9,000
Total cost of machinery	$    930,000
Land improvements:
Landscaping	$      42,000
Sprinkler system	$        9,000
Total Land improvements	$      51,000
Fork Lifts:
PV(9%,4,0,-76000,0)+12000	$      65,840
*Present value: n = 4, i = 9%
Prepaid insurance:	$      17,000