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. Initial valuation:

Land	1821720
Building	1214480
Land improvement ($89000 + $47000)	136000

Working:

Purchase cost of land and building	3000000
Title insurance	23000
Legal fees	8500
State transfer fees	4700
Total cost of land and building $	3036200

Note: The pro-rated property taxes for the period after acquisition $43000 are not included in the cost of acquisition of the land and building but are expensed out over the period for which paid.

	Appraised Value $	% of Total Appraised Value	Allocation of Cost $
Land	3000000	60%	1821720
Building	2000000	40%	1214480
Total	5000000	100%	3036200

2.

Land	3432700
Building	0
Land improvement ($89000 + $47000)	136000

Working:

	Land	Building	Land Improvements
Initial Cost	3036200	0	136000
Cost of demolishing the building	320000
Proceeds from sale of salvaged materials	-9500
Clearing and grading the land	86000
Total cost $	3432700	0	136000