Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech…
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Question “Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech…”
Answer
1 Calculation of the Initial Valuation. The following is an example:
Total purchase price = Land and building cost +Title insurance+Legal fees+State transfers fees
= $4,000,000+$26,000+$5,000+$5,000 = $4,036,000
(The property taxes paid upon acquisition would not be capitalized, but expensed.
The purchase price for land and buildings would be $4,036,000. This is shown in this table: (Amounts In $)
Asset |
Fair Values (A) |
Ratio (in %) (B) |
Allocated Cost (4,036,000*B). |
Land | 3,200,000 | 64% (3,200,000/5,000,000) | 2,583,040 |
Building | 1,800,000 | 36% (1,800,000/5,000,000) | 1,452,960 |
5,000,000 |
4,036,000 |
Parking Lot+Landscaping = Initial Value of Land Improvements
= $92,000+$50,000 = $142,000
The following is the initial valuation for each asset: (Amounts shown in $)
Land | 2,583,040 |
Building | 1,452,960 |
Land improvements | 142,000 |
2 In such a case, the cost of building would be negligible as the building acquired is demolished. All costs will be allocated for land.
Calculation for the Initial Value of Land (Amounts in USD)
Total purchase cost of land (part 1) | 4,036,000 |
Demolition costs | 350,000 |
Salvaged Materials for Sale | (6,000) |
Clearing and Grading Costs | 89,000 |
Total land value | 4,469,000 |
The cost of land improvements will be the same as in part 1. (i.e. $142,000).
The following is the initial valuation for each asset: (Amounts shown in $)
Land | 4,469,000 |
Building | 0 |
Land improvements | 142,000 |
Conclusion
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