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	$	16,000
Legal fees for drawing the contract		5,000
Pro-rated property taxes for the period after acquisition		36,000
State transfer fees		4,000

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.3 and $1.1 million, respectively. Shortly after acquisition, Samtech spent $82,000 to construct a parking lot and $40,000 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 $250,000 and the salvaged materials were sold for $6,000. In addition, Samtech spent $86,000 clearing and grading the land in preparation for the construction of a new building.

Answer 1

1. Total Cost of Land and Building:

Cost of Purchase	$ 4,000,000
Title Insurance	16,000
Legal Fees	5,000
Ste Transfer Fees	4,000
Initial Total Combined Cost of Land and Building	$ 4,025,000

Allocation of total cost to individual assets :

Asset	Fair Values	Proportion	Total Cost Allocated
Land	$ 3,300,000	0.75	$ 3,018,750
Building	1,100,000	0.25	1,006,250
	4,400,000		$ 4,025,000

Initial valuation of each asset :

Land: $ 3,018,750

Land Improvements: $ 122,000

Building : $ 1,006,250.

2. Now there is no building, because the building has been demolished.

Initial valuation of each asset:

Land	$	$
Purchase Price		4,000,000
Title Insurance		16,000
Legal Fees		5,000
State Transfer Fees		4,000
Demolition cost of building	250,000
Salvage value of scrap	(6,000)	244,000
Clearing and Grading		86,000
Total Cost of Land		4,355,000
Land Improvements
Parking Lot		82,000
Landscaping		40,000
Total Cost of Land Improvements		122,000