Question

Option #1: Acquisition Costs: Land and Building

You are the project manager at Janson Manufacturing. Feedback from the annual employee’s survey revealed that employees were interested in having a fitness center. Thus, last week, you closed the deal and purchased land and a building for $6 million. Other expenses incurred in connection to this purchase included:

Attorney fees for the contract	$10,000
Commissions	55,000
Title insurance	8,500
Pro-rated Property taxes	75,000

An independent appraisal was requested to determine the individual fair value estimates. The land appraised at $5.5 million and the building at $1.9 million.

Spending on the property started right away. Janson installed fences and completed the driveway at a cost of $45,000 and $75,000, respectively.

Required:

1. What is the initial valuation of each asset Janson purchased in these transactions?
2. Suppose Janson, immediately after acquiring the property, decided to tear down the building. The cost of the removal of the building was $350,000 and salvaged materials sold for $8,000. An additional $100,000 was paid to grade the land for building the new fitness center. What is the initial valuation of each asset Janson acquired in this transaction?

Answers must be submitted in an Excel file showing all calculations used to arrive at the final answers. Provide comments on the spreadsheet to explain the rationale for the amounts recorded.

Answer 1

Solution:

Janson Manufacturing

Determination of the initial valuation of each asset the company purchased in these transactions:

Initial Valuation of each asset:
Land	$4,513,825
Building	$1,559,675
Land Improvements
Fences	$45,000
driveway	$75,000

Computations:

Cost of land and building

Janson Manufacturing
Cost of land and building:
Purchase price	$6,000,000
Commissions	$55,000
Legal fees	$10,000
Title insurance	$8,500
Total Cost	$6,073,500

Note: the pro-rated property taxes are incurred after acquisition and hence not capitalized. Instead they are reported as prepaid taxes and expensed over a period of time.

Initial valuation of each asset acquired in the transaction:

Asset	Fair Value	Proportion	Initial Valuation
Land	$5,500,000	74.32%	$4,513,825
Building	$1.900,000	25.68%	$1,559,675
Total	$7,400,000	100%	$6,073,500

Requirement 2:

Cost of land:
Purchase price		$6,000,000
Legal Fees		$10,000
Commissions		$55,000
Title Insurance		$8,500
Total		$6,073,500
Less: demolition of old building	$350,000
Salvaged value	($8,000)	$342,000
grading costs		$100,000
Total cost of land		$6,515,500
Land Improvements:
Fencing		$45,000
Driveway		$75,000

The cost of land must comprise the costs incurred to make the land ready, including the cost of removal of old building (net of salvage value). Land is not a depreciable asset.

Cost incurred for land improvements such as landscaping, fencing and driveway also need to reported.