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	$	19,000
Legal fees for drawing the contract		6,500
Pro-rated property taxes for the period after acquisition		39,000
State transfer fees		4,300

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.7 and $1.3 million, respectively. Shortly after acquisition, Samtech spent $85,000 to construct a parking lot and $43,000 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 $280,000 and the salvaged materials were sold for $7,500. In addition, Samtech spent $82,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

Cost of land and building:

Cost of purchase	4000000
Title insurance	19000
Legal fees	6500
State transfer fees	4300
Total cost	4029800

Property taxes is not included in the cost

Allocation of total cost based on fair value:

	Fair value	Proportion	Total cost
Land	3700000	0.74	2982052
Building	1300000	0.26	1047748
	5000000		4029800

1. Initial valuation of each asset

Land	2982052
Building	1047748
Land improvements:
Parking lot	85000
Landscaping	43000

2.

Cost of land:
Cost of purchase		4000000
Title insurance		19000
Legal fees		6500
State transfer fees		4300
Demolition of building	280000
Salvage value of scrap	7500	287500
Clearing and grading		82000
Total cost of land		4399300
Land improvements:
Parking lot		85000
Landscaping		43000
Total land improvements		128000