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

1. Asset should be valued at purchase cost and all the expenses incurred up to the date of acquisition of such asset should be added to the cost of asset.

In the given case:

Purchase Cost	$4,000,000
Title Insurance	$25,000
Legal Fee	$9,500
Property Taxes	$45,000
State Transfer Fee	$4,900
	$4,084,400

Asset should be recognized at $4,084,400

As expenses incurred towards construction of parking lot and for landscaping are in capital nature, these amounts also need to be added to cost of the asset.

So the total cost of asset = 4084400+91000+49000

= $4,224,400

2. Demolition costs & clearing and grading of land expenses will increase the value of asset. So these are also capital in nature and should be added to cost of asset

Value of asset = 4224400+(340000+88000-5500)

= $4,646,900