CH 11 - Notes.word

CH 11 - Notes.word - CHAPTER 11 AMORTIZATION, IMPAIRMENT +...

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CHAPTER 11 AMORTIZATION, IMPAIRMENT + 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 resid- ual 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: What amount of the asset’s cost is to be amortized? What is the asset’s useful life? What pattern and method of cost allocation is best for this asset? AMOUNT TO BE AMORTIZED : Amortizable Amount - is the amount to be amortized Amortizable Amount = Original Cost of the Asset - 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 as- set’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, replace- ment with a more efficient asset and obsolescence
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AMORTIZATION METH - ODS : Overview EXAMPLE : Amortization Methods Crane Ltd. buys a crane at the beginning of the current fiscal year. Information re- lating 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 hours and assume 4,700 in next year Based on this information, calculate the amortization for the current year using: (a) Activity Method (b) Straight-Line Method (c) Decreasing Charge Method Activity Method : 1. Depreciable Base = $500,000 - $50,000 = $450,000 2. Amortization per hour = $450,000 ÷ 30,000 = $15.00/hour [same rate used each year] 3. Amortization (Current) = $15.00 x 4,000 hours = $60,000 Amortization Methods Financial Accounting Amortization Methods Tax Amortization Activity Methods Straight-Line Method Decreasin g Charge Methods Increasing Charge Methods Special Method Declining Balance Sum-of-the-years’-digits (not widely used in Group + Composite Hybrid Methods
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Amortization (Next) = $15.00 x 4,700 hours = $70,500 4. Amortization Schedule: Year Book Value (Begin of Year) Amortization Ex- pense Accumulated Amortization Book Value (End of Year) 1 $500,000 $60,000 $60,000 $440,000 2 $440,000 $70,500 $130,500 $369,500 Straight-Line Method : 1. Depreciable Base = $500,000 - $50,000 = $450,000 2. Annual Amortization = $450,000 ÷ 5 years = $90,000/yr [same rate used each year]
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This note was uploaded on 01/09/2010 for the course ACCT 351 taught by Professor Desmondtsang during the Spring '08 term at McGill.

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CH 11 - Notes.word - CHAPTER 11 AMORTIZATION, IMPAIRMENT +...

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