Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech made the following expenditures

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 $ 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, Samtech spent $91,000 to construct a parking lot and $49,000 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 $340,000 and the salvaged materials were sold for $5,500. In addition, Samtech spent $88,000 clearing and grading the land in preparation for the construction of a new building.

Answers

1)

total price $4,000,000

if purchased separately, land was worth $3,500,000 and building $1,500,000.

cost of land:

70% x $4,000,000 purchase cost = $2,800,000

70% x $34,000 title insurance = $23,800

70% x $9,000 legal fees = $6,300

70% x $5,800 state transfer fees = $4,060

total cost of land = $2,834,160

cost of building:

30% x $4,000,000 purchase cost = $1,200,000

30% x $34,000 title insurance = $10,200

30% x $9,000 legal fees = $2,700

30% x $5,800 state transfer fees = $1,740

total cost of land = $1,214,640

Property taxes for the period after acquisition are expenses and cannot be capitalized. Landscaping and parking lots are reported separately because they have different useful lives than the building.

2)

cost of land:

$4,000,000 purchase cost

$34,000 title insurance

$9,000 legal fees

$5,800 state transfer fees

$430,000 demolition costs

- $6,500 sale of salvaged value

$97,000 land grading

total cost of land = $4,569,300

cost of building = $0

Property taxes for the period after acquisition are expenses and cannot be capitalized. Landscaping and parking lots are reported separately because they have different useful lives than the building.

The calculation is shown below:-

Explanation:

1. Value to be capitalized $4,000,000 + $16,000 + $5,000 + $4,000

= $4,025,000

Assets              Fair value       Total percentage       Proportional value

Land             $3,300,000             75%                        $2,475,000

Building         $1,100,000             25%                        $275,000

total               $4,400,000                                           $2,750,000

Working Note :-

For Land = ($3,300,000 ÷ $4,400,000) = 75%

For Building = ($1,100,000 ÷ $4,400,000) = 25%

Land Improvement = $82,000 + $40,000

= $122,000

2. Purchase cost                                         $4,000,000

Add: Title insurance                                   $16,000

Add: Legal fees for drawing the contract  $5,000

Add: State transfer fee                                $4,000

Add: Demolition cost                                  $250,000

Add: Cleaning and grading cost                 $86,000

Less: Salvage material                                 $6,000

Cost of land                                                   $4,355,000

Land Improvement = $82,000 + $40,000

= $122,000

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