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

Solution

Samtech Manufacturing

1. Determination of the initial valuation of each asset Samtech acquired in these transactions:

Assets	Initial Valuation
Land	$2,423,640
Building	$1,615,760
Land Improvements
Parking Lot	$91,000
Landscaping	$49,000

Computations:

Cost of land and building:

Purchase price             $4,000,000

Title insurance             $25,000

Legal Fees                               $9,500

State transfer fees                   $4,900

Total cost                                $4,039,400

Note:

The pro-rated property taxes for the period after acquisition do not form part of the initial valuation. The item is reported as prepaid taxes and expenses for the related period.

Allocation of total purchase price of land and building based on relative fair value:

Asset	Fair Value	Percent to total	Initial Valuation
Land	$3,000,000	60%	$2,423,640
Building	$2,000,000	40%	$1,615,760
	$5,000,000	100%	$4,039,400

2. Requirement 2 –

Cost of land:
Purchase price		$4,000,000
Title Insurance		$25,000
Legal Fees		$9,500
State transfer fees		$4,900
Demolition of old building	$340,000
Less: Salvaged materials	($5,500)	$334,500
Clearing and grading costs		$88,000
Total cost of land		$4,461,900
Land Improvements:
Parking Lot		$91,000
Landscaping		$49,000