Question

Required:

1. How much can the dining area be valued at applying the going concern assumption? 
2. How much can the dining area be valued at based on liquidation value? 

Transcribed Image Text: Problem 3: Sound Value – Unit-in-place Method and Liquidation Value Green Resto Inc. constructed a separate open-air
dining area five years ago. It has the following components and cost to reproduce. Square Foot Cost to Reproduce P 3,000 Component Foundation
300 Floor 460 1,000 Walls 140 1,200 Ceiling Water, electrical and heating system 150 1,800 50 900 Square Foot Current Value of Land P 4,000
Component Land where the building is constructed on 300 Open spaces 500 5,000 It has 15 years le of its useful life. If sold today, it would cost
Green P400,000 to dispose.
Expert Solution

 Step 1

Introduction:

The expected price of an asset when it is given inadequate time to sell on the open market, minimizing its
exposure to possible purchasers, is known as liquidation value. The value of liquidation is usually less than
the fair market value. Unlike cash or securities, many illiquid assets, such as real estate, can take several
months to achieve their fair market worth in a sale and would o en sell for a considerably lower price if
compelled to sell in a shorter period. Forced liquidation or an orderly liquidation might result in a liquidation
value. Either value presupposes that the transaction is completed by a seller who is forced to sell and that the
exposure time is shorter than one year.

 Step 2

We can calculate total value of the dining area of valued at based on the liquidation value. 

Total value for components = Square foot (A) x Cost to reproduce (B)

1. Foundation 

              = 300 × 3000

= 900,000
2. Floor             = 460 × 1000
= 460,000
3. Walls             = 140 × 1200
= 168,000
4. Ceiling            = 150 × 1800
= 270,000
5. Water, electrical, and heating system = 50 × 900
= 45,000
= 300 × 4000
6. Land             
= 12,00,000
7. Open Space   = 500 × 5000
= 25,00,000
Total Value         = 55,43,000

Component Square Foot (A) Cost to Reproduce (B) Total Value (A+B)
Foundation 300 3000 900,000
Floor 460 1000 460,000
Walls 140 1200 168,000
Ceiling 150 1800 270,000
Water, Electrical, and
50 900 45,000
Heating
Land 300 4000 1,200,000
Open Space 500 5000 2,500,000
Total Value     5,543,000

WA S TH IS H EL P FU L ?