Question

Semtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Semtech 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, Semtech spent $91,000 to construct a parking lot and $49,000 for landscaping. Required: 1. Determine the initial valuation of each asset Semtech acquired in these transactions. (Enter your answers in whole dollars.) 2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Semtech demolished the building. Demolition costs were $340,000 and the salvaged materials were sold for $5,500. In addition, Semtech spent $88,000 clearing and grading the land in preparation for the construction of a new building. (Enter your answers in whole dollars.)

Answer 1

1.

Initial valuation:
Land	$2423640
Buildings	$1615760
Land improvement	$140000

Working:

	Cost of acquisition $
Purchase price of land and building	4000000
Title insurance	25000
Legal fees	9500
State transfer fees	4900
Total cost $	4039400

Note: The pro-rated property taxes for the period after acquisition $45000 are not included in the cost of acquisition of the land and building but are expensed out over the period for which paid.

	Estimated fair values $	Percent of total fair value	Allocation of acquistion cost $
Land	3000000	60%	2423640	($4039400 x 60%)
Building	2000000	40%	1615760	($4039400 x 40%)
Total	5000000	100%	4039400

Note: The cost to construct a parking lot $91000 and the cost of landscaping $49000 is considered under land improvement.

2.

Initial valuation:
Land	$2846140
Buildings	$1615760
Land improvements	$140000

Working:

	Land	Buildings	Land Improvements
Initial Cost	2423640	1615760	140000
Cost of demolishing the building	340000
Proceeds from sale of salvaged materials	-5500
Clearing and grading the land	88000
	2846140	1615760	140000