 In this presentation we will discuss lump sum purchases as it relates to property plant and equipment. When we purchase something like a building we typically have one lump sum purchase for more than just the building here because the building is on the land. If we're including the land we purchased the land with the building. If there are any other lease improvements that we need to break out separately then those two would be something that we need to break out in some way. This can be a little bit difficult given the fact that we have a lump sum purchase. Couple ways we could do this we may take a look at the property tax assessments and see what the breakout was done there in order to assess property taxes. We can also take an appraisal of the property and use the appraisal in order to make this assessment. The problem with this however is that the appraisal doesn't always match the purchase price. The appraisal may not have taken place right at the purchase price. We may not have purchased for the appraisal amount. So how then can we use the appraisal in order to create an allocation because that's the best thing we have in order to do so. Now it's also important to note that we need to break these things out. For example if we have a cost of 110,000 for the purchase of the store which includes land improvements and building. We need to break these things out because they have different depreciable lives. One we want to categorize them differently so that we know the value of the land versus the building and two we're going to allocate the cost over the useful life in different ways. For the most part land doesn't depreciate so whatever we apply to land will remain there forever and whatever we apply to building will then depreciate over the life of the building. And that's a significant difference. So it really depends what our objective is when we make this allocation in terms of which would we rather have. We want to be as objective as possible but just from the perspective of the company if you wanted to look better then you'd probably want to have land have more of the allocation because the building's going to deteriorate over time. As it does so the building will decline in value on the balance sheet. The balance sheet will go down and will record expenses related to that deterioration that called depreciation bringing down net income. If on the other hand we want to make net income smaller for tax purposes then we might want more in building than in land. We'd want to allocate this 110,000 more to building than land because the building is going to be depreciated and that will bring down net income whereas the land will not. So if we have the appraised amount if we have an appraisal of 35,000 for the land 15,000 for improvements 90,000 for the building that totals up to 140,000 that of course different than the cost the cost was only 110,000. So how can we use this 140,000 in order to allocate a different amount 110. One way to do that is to use a kind of ratio and this is going to be important it's useful for many different areas and so it's a really good concept to know here you'll see it other places within accounting as well as other areas when we need to do some type of allocation or a ratio analysis. So we've got the appraisal amount here the 35 land the land improvements 15 and the building 90 for an adding up to the total of 140,000. What we're going to do now is take the percentage of the total for each of these and use that percentage to then allocate the 110. So for example we'll take out the trusty calculator here we're going to take the 35,000 divided by the total 140,000. So that's 0.25 or 25 percent of the total. So that's 25 percent if we take a look at the 15,000 15,000 over compared to the total 140,000 we get 10.7 percent 10.71 percent and then of course if we take the 90 thousand divided by the 140 we get 0.64 929 and if we add all those up then we get the 100 percent. So that's going to be our key here. So we're going to just say obviously if we take the 25 plus the 10.71 plus the 64.29 we get the 100 percent. So that means we can use this allocation to allocate this amount. So we're going to allocate the cost now just multiply each one times the cost 110. So 25 percent of 110,000 gives 27,500 10.71 percent of 110 gives 11,786 64.29 percent of 110 gives that 70,714 for a total of the 110. So if we add all that up 1 2 7 500 plus 11 7 8 6 plus 7 0 7 1 4 gives us our 110. So that's very useful way to do this. So if we have some type of allocation method that doesn't quite allocate to the dollar amount we're looking for we can still use it. We can still use the appraisal. What we'll do is we'll take the ratio of the amounts compared to the total that'll give us the ratio then we that we can then multiply by the cost to find the proper allocation or an appropriate allocation.