hhofma3e_ch09_inst

Report
Chapter 9
1
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Measure the cost of a plant asset
Account for depreciation
Record the disposal of an asset by sale or
trade
Account for natural resources
Account for intangible assets
Describe ethical issues related to plant
assets
2
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Plant assets are relatively expensive
Last multiple years
Allocate costs based on benefits over the years
Real or tangible assets
Buildings, desk, equipment
Depreciation
Natural resources
Oil, diamonds, forest
Depletion
Intangible assets
Software, patents, goodwill
Amortization
3
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As time passes, the
services are used,
and the portion of
the asset cost used is
transferred to
expense.
The cost of plant
assets is the advance
purchase of services.
Date
Description
Debit
Then we get rid
of it, maybe for
more or less than
its book value.
Credit
Date
Description
Debit
Credit
Date
Description
Debit
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Credit
1
Measure the cost of a plant asset
5
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The Cost Principle
Rule for measuring an asset’s cost
Cost of an asset =
Sum of actual costs incurred to purchase
the asset and ready it for its intended
purpose
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Record purchases to accounts
based on asset behavior.
Land
Building
Not Depreciated
Depreciated
These two assets behave significantly
differently, so put them in different
accounts.
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NOT depreciated
Costs included in land:
Purchase price
Brokerage fees
Survey and legal fees
Property taxes in arrears
Title transfer
Costs of clearing and removing unwanted elements
Buildings and land improvements are not Land
Cost of an asset =
Sum of actual costs incurred to purchase the asset and ready it
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for its intended
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2012 Pearson Education, Inc. Publishing as Prentice Hall.
Capitalized
9
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Subject to depreciation
Examples:
Fencing
Paving
Sprinkler systems
Lighting
Signs
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Building Constructed
Architectural fees
Building permits
Contractor charges
Payments for material,
labor, and overhead
Capitalized interest
cost, if self-constructed
11
Building Purchased
Purchase price
Costs to renovate the
building for use
Similar to construction
costs
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Cost includes:
Net Purchase price
Transportation charges
Insurance while in transit
Sales tax and other taxes
Purchase commission
Installation/assembly
The cost of testing before
it is used
NOT
Related supplies
First
viable
production
run
12
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Purchase a group of plant assets for a single
price
Also called basket purchase
Assign cost to individual assets based on
relative sales values
Land
Land Improvements
Building
Equipment
13
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Obtain a market value appraisal of the pieces
Compute the ratio of each asset’s market value to
the total
The journal entry to record the purchase:
14
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Which is it?
Capital
Expenditure
Purchased a10,000
new delivery
Stair
life-time
$100
Master
scanners
for
stapler
truck
home
Capitalize
Revenue
Expense
Expenditure
Any material expenditure
that will benefit multiple
accounting periods.
Smaller dollar amounts or
consumed in one period.
To capitalize an expenditure
means to record it to an
asset account for now.
To expense an expenditure
means to charge it to an
expense account, NOW.
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Tig welder purchase
Welder price: $6,400
Sales tax: $500
Freight in: $100
Related
Total
Cost: $7,000
supplies:
$75
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Actual price
Sales tax
Delivery Freight Charges
Total cost
Date
Description
May 4 Welding Equipment
Cash
$
6,400
500
100
$
7,000
Debit
Credit
7,000
7,000
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2
Account for depreciation
23
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Allocation of cost to expense over its useful life
Matches expense against revenue generated
Buy it
Oven
Cash
Use it for 4 years
$5,000
Earn pizza sales revenue
$5,000
Sell the old oven
$1,000 more or less
Expense oven usage
$1,000 $1,000 $1,000
24
$1,000
Can you smell the matching
principle at work here?
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Depreciation is NOT:
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Allocating the portion of the
cost of a plant asset used to
expense in the periods in
which services are received
from the asset.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Allocating the portion of the
cost of a plant asset used to
expense in the periods in
which services are received
from the asset.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Allocating the portion of the
cost of a plant asset used to
expense in the periods in
which services are received
from the asset.
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Accumulated Depreciation
Contra-asset
Represents the portion of an
asset’s cost that has already
been allocated to expense.
Book Value
Cost - Accumulated Depreciation
= book value
Causes of Depreciation (incidental)
Physical deterioration
Obsolescence
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Data Item
Cost of capitalized asset
Estimated residual value
Depreciable cost
Estimated useful life–Years
Estimated useful life–Units
30
Amount
Asset debit amount
Salvage value
Cost–estimated
residual value
Length of the
service–how long
the company can
use the asset
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Straightline
Units-of
production
Decliningbalance
Equal
amounts
per
period
Different
amounts;
based upon
usage
Decreasing
amount
over time
as it ages
31
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Depreciation
= (Cost - Residual Value) x 1/life x #/12
Expense per Year
An equal amount is
expensed each year
The expense portrays an
item equally useful in
beginning & end of life
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January 1, 2011, Pizzaz Pizzas bought two new pizza ovens.
Paid $12,000 for the pair including transportation and installation.
Estimate useful life of 5 years.
Expect to sell the pair for $4,000 used after the 5 years
Prepare a complete Depreciation table using
The Straight Line method
Depreciation
= (Cost - Residual Value) x 1/life x #/12
Expense per Year
= ($12,000 – 4,000) x 1/5 x 12/12
= $1,600
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Journal Entry: Income
Statement impact.
What is the balance sheet
account entry?
Total depreciation to
date: Contra asset
account balances
The “Net” asset
Depreciation
= (Cost - Residual Value) x 1/life x #/12value on the
balance sheet
Expense per Year
= ($12,000 – 4,000) x 1/5 x 12/12
= $1,600
Depreciation
Expense
Year
At purchase
2011
$
2012
$
2013
$
2014
$
2015
$
$
1,600
1,600
1,600
1,600
1,600
8,000
Accumulated
Depreciation
(Balance)
$
$
$
$
$
1,600
3,200
4,800
6,400
8,000
Undepreciated
Balance
(book value)
$
12,000
10,400
8,800
7,200
5,600
4,000
Residual Value
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Full-Year convention: Record a full year’s depreciation the first year.
Eg May 1st purchase: 100% of full year’s amount
Overstates the first year depreciation, Materially so?
Actual Date: Record the depreciation from the actual date of
purchase. Eg May 1st purchase: 8/12 (or 244/365) x full year’s amount
The most precise option, requiring different calculations for each
item purchased on different dates.
½ -Year convention: Record 1/2 year’s depreciation the first year. Eg
May 1st purchase: 50% of full year’s amount. Extend past the final
year to catch up on the other ½ year.
Easy, balances error between over and understating
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Straight-Line Schedule: Using Full Year Assumption
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
bought
Book
Value
$39,000
2012
(39,000-6,000)  14
8,250
8,250
30,750
2013
(39,000-6,000)  14
8,250
16,500
22,500
2014
(39,000-6,000)  14
8,250
24,750
14,250
2015
(39,000-6,000)  14
8,250
33,000
6,000
36
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An equal amount of depreciation to each year.
Objective portrayal of consistent usage
Simple to implement
By far the most commonly used method
37
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Straightline
Units-of
production
Equal
amounts
per
period
Different
amounts;
based upon
usage
38
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Assigned depreciation rate to each unit of life
Unit can be miles, units produced, hours, etc.
Ideal for assets that are replaced because of wear,
and that are not used at a consistent rate
Annual depreciation depends on asset usage
Depreciation
= (Cost - Residual Value) x 1/ life in units
expense per unit
of output
39
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February 23, 2011, Pizzaz Pizza Bought a used truck to make deliveries.
The truck cost $7,000 and should last for 20,000 more miles.
They expect to drive the truck 2,000 miles the first year.
They will double their miles driven each year until the truck dies.
After that they should be able to sell the truck as-is for $1,000.
Prepare a complete Depreciation table using
The Units of Production method
Depreciation
= (Cost - Residual Value) x 1/ life in units
expense per unit
of output
= ($7,000 - $1,000) x 1/ 20,000 miles
= 30 cents / mile
40
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Cost $7,000, residual $1,000
20,000 miles of life.
Use 2,000 1st year, double annually
Delivery Truck: Units of Production Method
Depreciation
Year
Computation
Expense
bought
2012
2,000 miles  $.30
600
2013
4,000 miles x $.30
1,200
2014
8,000 miles x $.30
2,400
2015 Lesser of use or balance
1,800
41
Accumulated
Depreciation
600
1,800
4,200
6,000
Book
Value
$7,000
6,400
5,200
2,800
1,000
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Papa's Friend Chicken: Units of Production Method
Depreciation
Accumulated
Year
Computation
Expense
Depreciation
bought
2012
1,100 jobs x $3.00
3,300
3,300
2013
3,300 jobs x $3.00
9,900
13,200
2014
4,400 jobs x $3.00
13,200
26,400
2015
2,200 jobs x $3.00
6,600
33,000
42
Book
Value
$39,000
35,700
25,800
12,600
6,000
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SCHOLARSHIP OPPORTUNITY
CALCPA
SILICON VALLEY/SAN JOSE CHAPTER
The Silicon Valley/San Jose Chapter of CalCPA announces its scholarship program for 20112012.
This year, we will be awarding scholarships to students at each of the participating schools in our
area, as well as several overall scholarships, independent of school affiliation.
To be eligible for scholarship consideration, you must complete the attached scholarship
application and submit it by December 1, 2011. Award winners will be advised by January 2,
2012, and will be recognized at our Honorees Night, January 25, 2012.
Every applicant will receive a one year student membership in CalCPA (with access to CalCPA
programs), a free invitation to attend a chapter Young and Emerging Professionals event (a great
opportunity to meet, mingle and engage with peer-aged young professionals) and other potential
opportunities (still be decided).
To participate, please submit the attached application online, along with your resume, to the
educator contact identified for your school. Winners will be decided by the Scholarship
Committee, with input from your professors.
Over the last 13 years, the Silicon Valley/San Jose Chapter of CalCPA has awarded close to
$400,000 in scholarships to local accounting students. We look forward to your participation in
the program this year.
Regards,
Scholarship Committee
Silicon Valley/San Jose Chapter of CalCPA
43
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Straightline
Units-of
production
Decliningbalance
Equal
amounts
per
period
Different
amounts;
based upon
usage
Decreasing
amount
over time
as it ages
45
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2000
1500
1000
Straight Line
500
2X Declining
Balance
0
Year Year
Year Year
1
Year
2
3
4
5
The TOTAL amount expensed across the
entire useful life is identical. What changes?
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To reflect actual asset life behavior:
If the asset is more productive in the early years of its life.
To minimize Income taxes NOW:
To show increasing profitability year to year
Straight Line 2 years
Deprec. Exp. $4000
Acc. Dep. $4000
Year 1
Accelerated 2 years
Deprec. Exp. $6000
Acc. Dep. $6000
Deprec. Exp. $4000
Acc. Dep.
$4000
Year 2
Deprec. Exp. $2000
Acc. Dep.
$2000
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Accelerated method
More depreciation expense early in asset’s life
Less depreciation expense as it ages
Calculated as:
Depreciation
Expense
= (Cost – Accumulated Depreciation) x 2/life x #/12
= (Book Value) x 2/life x #/12
Note: The book value is the declining part
The 2 is the double part
Otherwise, it looks just like straight line
48
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2 times straight line rate
Book value
becomes period’s
depreciable cost
Book value declines
Depreciation expense declines
Final year’s expense leaves book value equal
to residual value, no lower & no higher
49
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(8856-1000) x ½
=
3,928
36,072
(8856-1000) x ½
=
3,928
40,000
4,928
Optional switch to straight line:
Do it when straight line would provide a higher expense than DDB
This avoids undesirable increase of expense in final year
50
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Papa's Fried Chicken: Double Declining Balance Schedule
Depreciation
Accumulated
Year
Computation
Expense
Depreciation
bought
2012 ($39,000)  2/4 x 12/12
2013 ($19,500)  2/4 x 12
2014
($9,750-$6,000) x 1/2
2015
($9,750-$6,000) x 1/2
51
19,500
9,750
1,875
1,875
19,500
29,250
31,125
33,000
Book
Value
$39,000
19,500
9,750
7,875
6,000
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Straight-line
Units-ofproduction
Doubledecliningbalance
Assets that
generate
revenue over
time
Assets that
depreciate due
to wear and tear
from use
Assets that
produce more
revenue in their
early years
52
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3
Record the disposal of an asset by sale or trade
61
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Asset wears out or becomes obsolete.
Company can:
Sell the asset for cash
Scrap the asset for no cash
Trade the asset for another asset
Result in a
gain or loss
Non-like property exchange
Like-kind exchange
No gain or loss
62
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Update depreciation
Remove old asset from books
Zero out asset by crediting for original cost
Zero out accumulated depreciation of asset by
debiting for all depreciation taken
Record the value of any cash paid or received
If a note was signed, credit Notes payable
Determine difference between total debits and
total credits
63
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April 1:
Arriano Fabrication Sold land & building for $100,000 cash and $800,000 Note
Receivable
Costs:
Land $50,000 Building $550,000
Accumulated depreciation, building $250,000
Date
Description
Debit
1-Apr Cash
Notes Receivable
Accumulated Depr. Building
Gain on sale of plant asset
Building
Land
DebitsDebits
and credits
Don’t match!
and credits
match!
Credit
100,000
800,000
250,000
550,000
550,000
50,000
$1,150,000
$1,150,000
$600,000
$1,150,000
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Asset traded for a like-kind asset
Difference will be recorded as a debit to the new
asset account
Asset sold or exchanged for a dissimilar asset
Gain or loss will be recorded
If debits > credits
GAIN
65
If debits < credits
If debits = credits
LOSS
NO GAIN
OR LOSS
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GPN purchased equipment on January 1, 2012, for $36,000.
Depreciation taken to date amounts to $16,000 after two years use.
GPN sold the equipment for $26,000 on December 31, 2013.
1. Journalize the sale of the equipment.
DATE
Journal Entry
ACCOUNTS AND EXPLANATIONS
Dec 31 Cash
DEBIT
CREDIT
26,000
Accumulated depreciation
16,000
Equipment
36,000
Gain on sale of asset
6,000
66
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4
Account for natural resources
68
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Plant assets coming from the earth
In or on the ground
Examples: Iron ore, oil, natural gas, diamonds, coal,
and timber
Expensed through depletion
Depletion expense–the portion of the cost used
up
Computed by the units-of-production method
69
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Formula
Estimated total units equals amount to
reasonably remove
Cost–Residual value equals value to be depleted
As resources sold, costs are moved to Depletion
expense
70
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Accumulated depletion–a contra account similar
to Accumulated depreciation.
Reported on the balance sheet similar to other
depreciable assets
71
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5
Account for intangible assets
74
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Non-current assets with no physical form
Provide exclusive rights or privileges
Expensed through amortization using the
straight-line method
Credit to the asset directly
If intangible has indefinite life, it is not amortized
75
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Patent
Copyright
Exclusive 20year right to
produce & sell
an invention
Exclusive right to
sell a book,
musical work,
film, art, software,
or intellectual
property (70 years
beyond the
authors life)
Amortized over
its useful life
Amortized over its
useful life
Trademarks brand names
Represent
distinctive
products or
services
Nike - swoosh,
Chevrolet – “Like
a Rock”
Amortized over
its useful life
Issued by the federal government
76
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Franchises & licenses
Goodwill
Privilege to sell goods or
services under specific
conditions
Excess of cost to
purchase another
company over market
value of its net assets
Examples: McDonalds,
Holiday Inn,
Dallas Cowboys
Amortized over its useful
life
77
Recorded only by an
acquiring company
Goodwill is not
amortized, it is expensed
through impairment
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Important to several industries
Pharmaceutical companies
Examples: Procter & Gamble, General Electric,
Intel, and Boeing
USGAAP Not an intangible
Expensed as incurred
IFRS
Capitalize Development
Amortized over product
life
78
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Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
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Goodwill
Not amortized.
Subject to assessment
for impairment
value and may be
written down.
Want a snack? Let’s buy:
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When one media company buys another, goodwill is often the most
costly asset. TMC Advertising paid $170,000 to acquire Seacoast
Report, a weekly advertising paper. At the time of the acquisition,
Seacoast Report’s balance sheet reported total assets of $130,000 and
liabilities of $70,000. The fair market value of Seacoast Report’s
assets was $100,000.
How much goodwill did TMC Advertising purchase when
acquiring Seacoast Report? Journalize the purchase.
$170,000 – ($100,000 – $70,000) = $140,000
Journal Entry
DATE ACCOUNTS AND EXPLANATIONS
DEBIT
Assets
100,000
Goodwill
140,000
Liabilities
81
Cash
CREDIT
70,000
170,000
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6
Describe ethical issues related to plant assets
82
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Capitalize
Results in higher asset value and larger net income
Looks better to investors
If cost provides a future benefit, then capitalize
Expense
Results in lower net income
Less taxes
If cost does not provide a future benefit, then
expense
83
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All costs spent to ready an asset to perform its intended
function are capitalized (debited to the asset account).
All repairs that neither extend the asset’s life nor
improve its efficiency are expensed.
Depreciation recovers the cost invested in an asset over
the asset’s useful life. In this section we illustrated three
methods: straight-line, UOP, and double-decliningbalance. Although the three methods allocate the cost
differently, when the asset’s life is over, the net book
value is always equal to the asset’s residual value.
Asset impairments also can reduce the value recorded
on the books for the asset. Impairments recognize
decline in an asset’s value for issues other than normal
depreciation.
84
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Asset trades or disposals are as common as asset
acquisitions. The key to recording the trade/disposal is
to first make sure the depreciation is current on the
asset. Then, record the value of items given up or
received in the trade/disposal based on whether the
trade is like-kind (no gain/loss) or not (potential
gain/loss).
Depletion is the word we use instead of depreciation to
attach to recovering the cost of natural resources. UOP
is the most common method used in depletion
accounting.
85
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Intangible assets are assets whose value is not
represented by their physical form but from their
original creativity. The cost invested in
intangibles is recovered using amortization,
usually using the straight-line method since the
intangible’s life is the best measure of its decline
in value.
Ethical issues regarding the recording of assets
should revolve around the definition of an asset.
That is, does this item provide future economic
benefit? If so, it’s an asset.
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Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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