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	$	34,000
Legal fees for drawing the contract		9,000
Pro-rated property taxes for the period after acquisition		54,000
State transfer fees		5,800

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.5 and $1.5 million, respectively. Shortly after acquisition, Samtech spent $100,000 to construct a parking lot and $58,000 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 $430,000 and the salvaged materials were sold for $6,500. In addition, Samtech spent $97,000 clearing and grading the land in preparation for the construction of a new building.
  

Answer 1

Part 1
Cost of Land and Building
Purchase Price	$                        4,000,000
Title search and insurance	$                             34,000
Legal Fees	$                               9,000
State Transfer Fees	$                               5,800
Total Cost Land and Building	$                        4,048,800
Allocation of Total Costs	Fair Value	Percentage of Total Fair value	Total Cost of Acquisition	Allocated Cost
Land	$3,500,000	70.00%	$4,048,800	$2,834,160
Building	$1,500,000	30.00%	$4,048,800	$1,214,640
Total	$5,000,000			$4,048,800
Valuation of Assets:
Land	$2,834,160
Building	$1,214,640
Land Improvements
Parking Lot	$100,000
Landscaping	$58,000
Part 2
Cost of Land:
Purchase Price		$       4,000,000
Title search and insurance		$            34,000
Legal Fees		$              9,000
State Transfer Fees		$              5,800
Demolition of old Building	$                           430,000
Less:Sale of materials	$                              -6,500	$          423,500
Clearing and grading costs		$            58,000
Total Cost of Land		$       4,530,300
Land Improvements
Parking Lot		$100,000
Landscaping		$58,000