Question

During 2016, ABC Corp acquired assets from XYZ Corp. The assets have been appraised as follows: Buildings: $1,000,000 Machinery: $500,000 Land: $2,500,000 ABC Corp paid $500,000 in cash and 50,000 shares with a par (market) value of $1 ($30). In addition, ABC made the following expenditures: Removal of old building on land: $100,000, Proceeds on the removal were $15,000. Cleaning up contaminated land: $50,000 Fees on acquisition of Building: $10,000 Determine the value of the Buildings on ABC Corp's balance sheet.

Answer 1

ABC Corp acquires assets from XYZ Corp. Hence ABC is the Purchaser and XYZ is the Seller.

The total appraised values of the Assets are:

Building:    $ 1,000,000

Machinery: $ 500,000

Land: $ 2,500,000​

​Total Value $4,000,000

Purchase Consideration paid for acquiring the assets:

Cash: $5,00,000 and Shares : 50,000 shares @ $30 (Market Price) : $5,00,000+$ 1,500,000 = $ 2,000,000

Expenses Incurred during Acquisition:

Removal of old building on land : $ 100,000 (Included in the cost of land)

Proceeds on removal : $15,000 (Deducted from the cost of land)

Cleaning up contaminated Land: $50,000 ( Included in the cost of land)

Fees on acquisition of Building: $10,000 (Included in the cost of Building)

Per the Accounting standard, The correct amount of cost to allocate to a productive asset is based on those expenditures that are ordinary and necessary to get the item in place and in condition for its intended use​.

Hence the new cost values for the assets are :

Building: $1,000,000 +$ 10,000 = $ 1,010,000

Land: $2,500,000 + $100,000- $15,000 +$50,000=$2,635,000

Machinery: $5,00,000

Since the total value of components ($4,145,000) is much higher purchase consideration ($2,000,000), thus for determining the cost in the books of ABC Corp. we will allocate the purchase consideration proportionately.

$2,000,000/$4,145,000 *100 = 48.251%

Thus, the value of Buildings on ABC Corp's Balance Sheet = $1,010,000*48.251% = $487,344