Samtech Manufacturing purchased land and a 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:
Determine the initial valuation of each asset Samtech acquired in these transactions.
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.
To determine the initial valuation of each asset Samtech acquired, we need to add up the purchase price and all the associated expenditures.
1. Land:
The fair value of the land, if purchased separately, is given as $3.3 million. Since Samtech purchased the land along with the building, we can assume that the land's value is the part of the total purchase price attributed to the land.
To calculate the land's initial valuation, we can use the following formula:
Land Valuation = (Fair Value of the Land / Fair Value of the Total Assets) * Total Purchase Price
Land Valuation = ($3.3 million / ($3.3 million + $1.1 million)) * $4 million
Land Valuation = ($3.3 million / $4.4 million) * $4 million
Land Valuation = $3.3 million
Therefore, the initial valuation of the land is $3.3 million.
2. Building:
As with the land, we can assume that the building's value is the part of the total purchase price attributed to the building.
Building Valuation = (Fair Value of the Building / Fair Value of the Total Assets) * Total Purchase Price
Building Valuation = ($1.1 million / ($3.3 million + $1.1 million)) * $4 million
Building Valuation = ($1.1 million / $4.4 million) * $4 million
Building Valuation = $1.1 million
Therefore, the initial valuation of the building is $1.1 million.
Now, let's determine the initial valuation of each asset if Samtech demolished the building after acquisition:
3. Land (after demolition):
After the building is demolished, the valuation of the land remains the same.
Land Valuation (after demolition) = $3.3 million
4. Demolition Costs:
Demolition costs do not affect the valuation of any asset since they are costs incurred to remove an existing structure.
Demolition Costs = $250,000
5. Salvaged Materials:
The salvaged materials were sold for $6,000. Since this amount was received from selling the materials, it can be deducted from the demolition costs.
Adjusted Demolition Costs = Demolition Costs - Salvaged Materials
Adjusted Demolition Costs = $250,000 - $6,000
Adjusted Demolition Costs = $244,000
6. Clearing and Grading Costs:
Clearing and grading costs are additional costs incurred to prepare the land for the construction of a new building. These costs increase the initial valuation of the land.
Land Valuation (after demolition and clearing/grading) = Land Valuation (after demolition) + Clearing and Grading Costs
Land Valuation (after demolition and clearing/grading) = $3.3 million + $86,000
Land Valuation (after demolition and clearing/grading) = $3.386 million
Therefore, the initial valuation of the land, assuming the building is demolished and clearing/grading costs are incurred, is $3.386 million.