Question

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3 and $1 million, respectively. Shortly after acquisition, Samtech spent $83,000 to construct a parking lot and $41,000 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 $260,000 and the salvaged materials were sold for $6,500. In addition, Samtech spent $80,000 clearing and grading the land in preparation for the construction of a new building.
  

Answer 1

1.The initial valuation of the asset Samtech acquired-

Cost of Land = $3,000,000.

Cost of Building=$1,000,000

However, the land and building needs to be purchased together.

2. The initial valuation of the asset after Samtech acquisition-

Cost of land-

P

Particulars		Amount(in $)	Explanation
	Cost of acquisition	4,000,000	$(3mn+1mn) (because the building is demolished)
Add:	Parking lot construction	0	Land improvement
Add:	Landscaping	0	Land improvement
Add:	Demolition cost	260,000
Less:	Salvaged Materials	6,500
Add:	Clearing and grading	80,000
		4,333,500

There will be no Building cost as the building is demolished. Hence, the cost of the building will be clubbed together with thr land cost.

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