Chapter 11 Lecture 12 final version last

Chapter 11 Lecture 12 final version last -...

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Welcome to ADMS 3585:  Intermediate Accounting 1 ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 1 
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Agenda: Chapter 11 Q & A – Chapter 11 Break for 15 minutes Exercise Time  ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 2
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Chapter 11 – Amortization, Impairment  and Disposition. ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 3
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Amortization. 1.Amortization (also known as depreciation) is a means of  cost allocation 2.It is not a method of valuation Amortization involves: 1. allocating the cost of capital assets (less salvage or  residual value) over the periods expected to benefit from  the use of the assets 2. The asset’s cost is allocated to Amortization Expense over  the asset’s useful life ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 4
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Amortization.   Important factors to consider for  Depreciation  Expense. 1. Amount of the asset’s cost is to be amortized. 2. Asset’s useful life 3. Pattern and method of cost allocation is best for  this asset. ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 5
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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 ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 6
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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 ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 7
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Amortization Methods. ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 8 Amortization Methods Financial Accounting Amortization Methods Tax Amortization  (Appendix 11A) Straight-line method Decreasing charge methods 1. Declining-balance 2. Sum-of-the-years’-digits     (not widely used in Canada) Special methods 1. Group and Composite 2. Hybrid methods Increasing Charge Methods Activity  Methods
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Example. ADMS 3585 – Fall 2009 –  Lecture 11  - Slide 9 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
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