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 Legal fees for drawing the contract Pro-rated property taxes for the period after acquisition State transfer fees $26,000 5,000 46,000 5,000 An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.2 and $1.8 million, respectively. Shortly after acquisition, Samtech spent $92,000 to construct a parking lot and $50,000 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 $350,000 and the salvaged materials were sold for $6,000. In addition, Samtech spent $89,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

1) Calculation of Initial Valuation is shown as follows:-

Total Purchase price = Land and building purchase cost+Title insurance+Legal fees+State transfer fees

= $4,000,000+$26,000+$5,000+$5,000 = $4,036,000

(The property taxes paid after acquisition would not be capitalized but expensed).

The purchase price of $4,036,000 would be allocated to land and building in the ratio of their fair values which is shown as follows:- (Amounts in $)

Asset	Fair Values (A)	Ratio (in %) (B)	Allocated cost (4,036,000*B)
Land	3,200,000	64% (3,200,000/5,000,000)	2,583,040
Building	1,800,000	36% (1,800,000/5,000,000)	1,452,960
	5,000,000		4,036,000

Initial value of land improvements = Parking Lot+Landscaping

= $92,000+$50,000 = $142,000

Therefore initial valuation of each asset is shown as follows:- (Amounts in $)

Land	2,583,040
Building	1,452,960
Land Improvements	142,000

2) In this case cost of building would be zero as the acquired building is demolished and all cost will be allocated to land.

Calculation of Initial Value of land (Amounts in $)

Total Purchase cost of land (from part 1)	4,036,000
Demolition cost	350,000
Sale of Salvaged materials	(6,000)
Clearing and grading cost	89,000
Total value of land	4,469,000

Cost of Land improvements will be same as calculated in part 1. (i.e. $142,000).

Therefore initial valuation of each asset is shown as follows:- (Amounts in $)

Land	4,469,000
Building	0
Land Improvements	142,000