It is necessary to allocate a lump sum payment to individual items in order to record a fair portion of the lump sum in each of the proper general ledger accounts.

For instance, let's assume that a corporation made a lump sum payment of $450,000 in order to acquire a building, the land on which the building sits, and also some equipment. The lump sum payment means that the total cost of $450,000 has to be allocated among three general ledger accounts: Land, Buildings, and Equipment. The allocation must be done in a logical manner for the following reasons:

  1. the portion of the lump sum cost that is recorded in the Land account will not be depreciated

  2. the portion of the lump sum cost that is recorded in the Buildings account might be depreciated over a 25-year period, and

  3. the portion of the lump sum cost that is recorded in the Equipment account might be depreciated over 7 years.


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