Jones Brothers Contruction Case
Business and Management
Submitted By jclemons
The cost basis is the amount of cost incurred when purchasing an asset based on the percentage of total value to fair market value of the asset. The fair market value of the land, building and equipment were $400,000, $1,500,000 and $300,000 respectively. The total fair market value of all the assets is $2,200,000. To figure out the cost basis we must first allocate a percentage of the total value to each of the asset. Land is valued at 400,000 and I divided by the total value and figure that land is about 18.18% of the total cost of the assets. Then conducting the same allocation to the building I figure that the cost of the building was 68.18% of total assets. The resulting cost for the equipment was 13.64% of total assets. The next process in the calculation of the cost basis is multiplying the total cost by the allocation percentages calculated earlier. I determined that the cost of land was $363,636, building was $1,363,636, and equipment was $272,727.
The next factor in determining the cost is the interest accrued on the loans borrowed to acquire the asset. Each loan was acquired and used only for a certain amount of time less then the period of the loan so we must consider that into our calculation of the loan. The first loan for $600,000 at 10% interest was a 3 year loan acquired on February 1, 2010. Which means on April 30, 2011 the loan was held for 453 days, so the total interest accrued on the loan was $74,466. By allocating the percentage of assets by the interest accrued I determine that for Loan cost one land was $13, 539, building cost was $50,772 and equipment cost was $10,154 which all will be added to the total cost of the asset. For loan 2, which was $400,000 at 6% for 5 year, we can consider that same aspect but subtract 7 days from the time the Loan 1 was held. So loan 2 was held for a period of 446 days and the total interest incurred was...