Now think of a different kind of cost that it could have with the car.
Let's say I put a flame red decal on the side,
I put a little spoiler on the back, maybe a T top.
So if you're a fan of the old Smokey and.
Smokey and the Bandit movies.
You'll know what I'm talking about.
But anyway, that kind of customization of the car, is going to increase its life,
I'm going to be more willing to use it longer.
Increase its value, people would pay more for it, so that will,
those kinds of costs could be capitalized.
Another example.
Let's say I have a building made out of wood.
Wood needs to be painted every now and then to maintain the building.
So the cost of painting a wood building would be routine maintenance and expense.
Now let's say I have a brick building.
You don't need to paint brick to keep it up.
It'll last other last anyway.
So if I paint a brick building, presumably I'm doing that to extend its life.
I'll keep it longer, or increase its value.
And so the cost of painting would be capitalized for
a brick building, but expensed as maintenance for a wood building.
That sort of seems like a trivial decision,
but actually one of the big frauds earlier in the century was all around this issue.
WorldCom was basically taking routine maintenance,
which should be expensed, and capitalizing it, which helped its EBITDA.
Because what it was doing, it's turning an expense into depreciation.
And of course, depreciation does not effect your EBITDA.
So this is not a neutral decision.
And there have been situations where companies have abused this to make
themselves look much better.
>> [SOUND] Let's go back to our Bott example.
Now Bott spends $200 cash on routine maintenance for the equipment.
I'll put up the pause sign and you can try to do this journal entry.