chapter11_notes - Chapter 11 Amortization Impairment and...

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Chapter 11: Amortization, Impairment, and Disposition Amortization – Concept: Amortization (also known as depreciation) is a means of cost allocation It is not a method of valuation Amortization involves: allocating the cost of capital assets (less salvage or residual value) over the periods expected to benefit from the use of the assets The asset’s cost is allocated to Amortization Expense over the asset’s useful life Factors in the Amortization Process: Questions to be answered to determine the amount of amortization expense: 1. What amount of the asset’s cost is to be amortized? 2. What is the asset’s useful life? 3. What pattern and method of cost allocation is best for this asset? Amount to be Amortized: Amortizable amount is the amount to be amortized It is calculated as: Original cost of the asset less estimated residual value (or salvage or disposal value) Residual value is the estimated net realizable value of a capital asset at the end of its useful life to the entity Salvage value is the asset’s estimated net realizable value at the end of the asset’s life Useful Life of an Asset: An asset’s useful (or service) life and physical life are not the same (expressed in time or units) Useful life is sometimes referred to as the economic life—the period of time over which the asset will produce revenue for the company Factors affecting useful life are: Wear and tear, inadequacy to company due to change in demands, replacement with a more efficient asset and obsolescence
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Amortization Methods – EXAMPLE: Crane Ltd. buys a crane at the beginning of the current fiscal year. Information relating to the crane follows: Cost: $500,000 Estimated useful life: five years (or 30,000 hours) Residual value end of five years of use: $50,000 Actual hours used during the current year: 4,000
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chapter11_notes - Chapter 11 Amortization Impairment and...

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