Question

Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building:
 

Title insurance	$	25,000
Legal fees for drawing the contract		9,500
Pro-rated property taxes for the period after acquisition		45,000
State transfer fees		4,900

 
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 $91,000 to construct a parking lot and $49,000 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 $340,000 and the salvaged materials were sold for $5,500. In addition, Samtech spent $88,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

Req 1)

step 2)	% of total fair  value (step 3)	Inital value
3,000,000	0.6 or 60%	2,423,640	land
2,000,000	0.4 or 40%	1,615,760	building
5,000,000	1 or 100%	4,039,400	total

step 1) 4,000,000+25,000+9,500+4,900= 4,039,400

step 3) 5,000,000/3,000,000= 0.6

5,000,000/2,000,000= 0.4

step 4) 0.6*4,039,400= 2,423,640

0.4* 4,039,400= 1,615,760

step 5) land improvement 91,000+49,000= 140,000

answer: 

assets	initial valuation
land	2,423,640
building	1,615,760
land improvements	140,000

Req 2) 

step 1) 340,000- 5,500= 334,500

step 2) 4,000,000+25,000+9,500+4,900+334,500+88,000= 4,461,900 total cost of land

step 3) 91,000+49,000= 140,000 land improvements

step 4) building= 0

Answer:

assets	initial valuation
land	4,461,900
building	0
land improvements	140,000