Question

Samtech Manufacturing purchased land and building for $3 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building:

Title insurance	$	17,000
Legal fees for drawing the contract		5,500
Pro-rated property taxes for the period after acquisition		37,000
State transfer fees		4,100

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3 and $1 million, respectively. Shortly after acquisition, Samtech spent $83,000 to construct a parking lot and $41,000 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 $260,000 and the salvaged materials were sold for $6,500. In addition, Samtech spent $80,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

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1	Land	$               22,69,950
	Building	$                 7,56,650
	Land Improvements	$                 1,24,000
2	Land	$               33,60,100
	Building	0
	Land Improvements	$                 1,24,000
	Workings:
1	Value to be Capitalized:
	Purchase Price	$               30,00,000
	Title Insurance	$                     17,000
Add:	Legal fees	$                       5,500
Add:	State transfer fees	$                       4,100
	Value to be Capitalized	$               30,26,600
	Assets	Fair Value (a)	Percentage (b) = [(a)/ Total]	Proportional Value (b X Total)
	Land	$               30,00,000	75%	$                    22,69,950
	Building	$               10,00,000	25%	$                      7,56,650
	Total	$               40,00,000		$                    30,26,600
	Land	$               22,69,950
	Building	$                 7,56,650
	Land Improvements	($83,000 + $41,000)
		$                 1,24,000
2	Computation of Cost of Land:
	Purchase Price	$               30,00,000
Add:	Title Insurance	$                     17,000
Add:	Legal fees	$                       5,500
Add:	State transfer fees	$                       4,100
Add:	Demolition cost	$                 2,60,000
Add:	Cleaning and grading cost	$                     80,000
Less:	Salvage value of material	$                     -6,500
	Cost of Land	$               33,60,100