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10 - Costs to Assign to PP&E - YouTube
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I'm Larry Walter this is principles of
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accounting dot-com chapter 10 in this
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particular module we will consider the
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assignment of cost to property plant and
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equipment and so let's start out
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recognizing some principles property
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plant and equipment is a separate
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category on a classified balance sheet
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it typically follows the long term
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investments section and it includes the
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physical assets that are deployed in the
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operation of the business for example
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land buildings and equipment recognize
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that idle land or land that's Health for
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speculation or other idle facilities
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would probably be listed in the long
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term investments category property plant
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equipment is for the active tangible
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productive assets used by the business
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items are usually listed by expected
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life and so in this case we show land
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listed first it has an indefinite or
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permanent life followed by buildings
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which have a fairly long life but
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certainly not permanent and then
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equipment which might have a much
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shorter life three five ten years for
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example I've shown each of the
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depreciable categories building an
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equipment net of their related
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accumulated depreciation some companies
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might report just a single number for
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property plant and equipment and leave
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this level of detail to the footnotes in
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the financial statement moving on to
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consideration of cost assignment there's
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a term you should be aware of capital
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expenditures those are the costs that
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are ordinary and necessary to get the
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items in place and in condition for
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their intended use would include the
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purchase price for the asset plus cost
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related to permits freight ordinary
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installation initial set up calibration
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programming other such normal cost other
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expenditures that are not ordinary and
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necessary or benefit only immediate
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period should be expenses incurred for
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example repair of abnormal damage caused
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during installation here's an example
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Peck Bloch corporation purchased a new
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lathe the lathe had a list price of
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ninety thousand dollars Peck flat
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managed to negotiate a discount of 10%
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on the purchase Peck blood also paid
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frightened installation cost of five
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thousand dollars
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let's look at the equipment here first
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of all ninety thousand dollars is not
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the price that's the list price we would
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back out the 10% discount we negotiate
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and say well we got eighty one thousand
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dollars purchase price for the item but
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we also had to incur five thousand
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dollars of installation cost so our
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total equipment would be shown at eighty
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six thousand I have a debit to equipment
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at eighty six thousand however during
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installation we damage the spindle on
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the lathe and it had to be replaced
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thousand dollars that was not ordinary
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and necessary we're going to charge that
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off as a repair expense of two thousand
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dollars so our total outlay of eighty
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eight thousand s attributed eighty six
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thousand equipment in two thousand two
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repair costs
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moving on to interest cost interest cost
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paid to finance the purchase price of
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property plant equipment is to be
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expensed it is not a capital
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expenditures however interest incurred
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on funds borrowed to finance the
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construction of property plant equipment
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may be incurred these rules are fairly
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complex and typically covered in
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intermediate accounting courses in
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general though its actual interest cost
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incurred during the active construction
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period nothing more than that would be
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capitalized the rest of the interest
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cost would be expensed what about
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training cost well typically not a
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capital expenditure they're generally
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expense the training is deemed to be
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something that are taxes the employee
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and not the property plant and equipment
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we might have an exception for that if
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it's a very specialized training usually
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when the training is company specific
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and benefits many periods so it may be a
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nuclear power plant where you're
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retraining operators on the operation of
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just that particular facility that's not
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perhaps a transportable skill and is
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unique to a particular location you
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might make a case for capitalization but
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generally we're not going to be
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capitalizing the training cost let's
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look at land and land improvements land
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costs usually include the cost of the
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land plus title fees legal fees survey
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cost zoning fees preparation costs such
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as grading and draining the land are
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also included but recognize that they're
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also costs that are not land land
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improvements this would include the cost
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of parking lots sidewalks landscaping
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irrigation systems and similar
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expenditures those are typically
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capitalized but as a separate asset the
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rationale is that improvements unlike
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land wear out and would be depreciated
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you would need to eventually replace a
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sprinkler system or landscaping for
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example now sometimes assets might be
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purchased in a lump sum a company by an
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existing facility that consists of land
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buildings and equipment the purchase
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price must be allocated to those
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individual components so here at the
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dental corporation acquired a facility
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for two million dollars the facility
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consisted of land buildings and
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equipment that had respective fare
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values of 500 750 and 1 million 250
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we got a bargain purchase the individual
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pieces add up to two million five
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hundred thousand but we were able to buy
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the facility for 80 percent of that
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amount our two million dollars and so in
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our calculations we would simply take
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the the estimated values of each
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component times the proportion of the
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value and total that was reflected by
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the purchase price or 80 cents on the
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dollar and we would come up with the
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cost assignment to the individual assets
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this cost assignment would be very
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typical recognize that it would be
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appropriate for buying assets but not
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business's business if the asset package
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is deemed to be a business we would
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default to our business combination
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accounting considerations
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additionally actually point out that on
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an international basis whereas in the US
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and the US generally accepted accounting
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principles we would assign 750,000 of
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the building globally it's very common
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to encounter a component type allocation
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so you might look at a building and say
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well it's a building sure enough but
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it's got a roof that has a separate life
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heating and air conditioning system with
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a separate life and so on so there's
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actually more allocation of costs and
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international accounting standards than
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there is in the US GAAP
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so we've come up with our cost
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assignment of two million dollars and
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here's the journal entry roof-like that
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the credit de cash of two million
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results in debits to land buildings and
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equipment for those respective amounts
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eighty percent of the fair value of each
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recognize that professional judgment is
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required to make these allocations the
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determination of fair value of the
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components was given in my illustration
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as a practical matter that can involve
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complexities subjectivity a significant
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amount of professional judgment
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the initial allocations do have major
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impacts on future depreciation patterns
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for example if we had allocated a
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different amount to land and buildings
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we would have future depreciation
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expense that differs because lands not
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depreciable so it is an important
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allocation decision there are also
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materiality considerations some
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long-lived asset expenditures are
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relatively minor in value if we buy a
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trash can or telephones or pictures on
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the wall it may not be worth the cost to
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account for those islands we might
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expense those immediately for expediency
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sake
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many businesses expense small cost has
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incurred the record-keeping cost of
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capitalizing and subsequently
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depreciating these assets over their
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useful life certainly can exceed the
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benefit of doing so
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