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 $ 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: 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 $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.

Answer 1 ) The initial valuation of each asset Samtech acquired in these transactions:

Assets              Fair value       Total percentage       Proportional value

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

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

Total               $4,400,000           100 %                      $2,750,000

Working Notes :

Answer 2)  The initial valuation of each asset, assuming that immediately after acquisition that Samtech demolished the building:

   Entries                                                  Amounts

     Total Cost of land                                      $4,355,000

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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

the answer is "b.the increased supply will create a surplus. "

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