3 Exercise 10-3 Acquisition costs; lump-sum acquisition [LO10-1, 10-2] 0.5 point

ID: 2588514 • Letter: 3

Question

3 Exercise 10-3 Acquisition costs; lump-sum acquisition [LO10-1, 10-2] 0.5 points 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 Print $16,000 Title insurance Legal fees for drawing the contract Pro-rated property taxes for the period after References 5,000 36,000 4,000 acquisition State transfer fees 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 (Enter your answers in whole dollars.) Assets Initial Valuation Land Building Land improvements $ 122,000

Explanation / Answer

Cost of land and building:

Purchase price $4,000,000

Title search and insurance 16,000

Legal fees 5,000

State transfer fees 4,000

Total cost $4,025,000

The total is allocated to the land and building based on their relative fair values:

Asset

Fair Value

Percent of Total Fair Value

Initial

Valuation

(Percent x

$4,025,000)

Land

$3,300,000

75%

$3,018,750

Building

1,100,000

1,006,250

$4,400,000

100%

$4,025,000

Assets:

Land $3,018,750

Building 1,006,250

Land improvements:

Parking lot 82,000

Landscaping 40,000

122000

Cost of land: