Question

1) Calculation of Initial Valuation is shown as follows:-

Total Purchase price = Land and building purchase cost+Title insurance+Legal fees+State transfer fees

= \$4,000,000+\$26,000+\$5,000+\$5,000 = \$4,036,000

(The property taxes paid after acquisition would not be capitalized but expensed).

The purchase price of \$4,036,000 would be allocated to land and building in the ratio of their fair values which is shown as follows:- (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

Initial value of land improvements = Parking Lot+Landscaping

= \$92,000+\$50,000 = \$142,000

Therefore initial valuation of each asset is shown as follows:- (Amounts in \$)

 Land 2,583,040 Building 1,452,960 Land Improvements 142,000

2) In this case cost of building would be zero as the acquired building is demolished and all cost will be allocated to land.

Calculation of Initial Value of land (Amounts in \$)

 Total Purchase cost of land (from part 1) 4,036,000 Demolition cost 350,000 Sale of Salvaged materials (6,000) Clearing and grading cost 89,000 Total value of land 4,469,000

Cost of Land improvements will be same as calculated in part 1. (i.e. \$142,000).

Therefore initial valuation of each asset is shown as follows:- (Amounts in \$)

 Land 4,469,000 Building 0 Land Improvements 142,000

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