ADMS3585W09_Ch11 slides

ADMS3585W09_Ch11 slides - CHAPTER 11...

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C H A P T E R 11 11 Amortization, Impairment, and  Disposition
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Amortization – Concept Amortization involves: Allocating the cost of capital assets to expense in a  systematic  and  rational   manner to periods expected  to benefit from use of assets The terms  amortization  and  depreciation   are used  interchangeably Questions to be answered: 1. What amount of the asset’s cost is to be amortized? 2. What is the asset’s useful life? 3. What amortization method is best for this asset? 
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1. Amount to Be Amortized Also called “amortizable amount”  Theoretically, it is determined as: Original cost of the asset  less e stimated residual value, or  Original cost of the asset  less  estimated salvage value       Whichever is greater Residual value  is defined as the estimated net realizable value  useful life to the  entity Salvage value  is defined as the estimated net realizable value  physical life (not  acceptable under IFRS) Estimate of residual (or salvage) value often depends on  experience and judgment For simplicity of illustration, in this chapter, only residual value  is used as the basis to decide amortizable cost. 
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2. Useful Life of an Asset An asset’s  useful life  and  physical life  are not  the same Useful life is sometimes referred to as the  economic   life —the period of time over which  the asset will produce revenue for the firm Useful life may be shorter than physical life  due to: physical  factors (such as wear and tear, casualty) economic  factors (such as obsolescence) Useful life can be expressed in time or units
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3. Amortization Methods:  Overview Amortization Amortization Methods Methods Financial Accounting Financial Accounting Amortization Methods Amortization Methods Tax Tax Amortization Amortization Activity Activity method method Straight-line Straight-line Method Method Decreasing Decreasing charge charge methods methods 1. Declining-balance 1. Declining-balance 2. Sum-of-the-years’-digits 2. Sum-of-the-years’-digits (not widely used in Canada) (not widely used in Canada) Special Special methods methods 1. 1. Group and Composite Group and Composite 2. 2. Components method Components method 3. 3. Hybrid or combination Hybrid or combination methods methods Increasing Increasing Charge Charge Methods Methods
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Example Crane Ltd. buys a crane at January 1, 2006. 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: 4000 hours in 2006; 4700, 6300, 8000, 
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This note was uploaded on 04/27/2010 for the course ADMS 3585 taught by Professor Sandra during the Spring '10 term at York University.

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ADMS3585W09_Ch11 slides - CHAPTER 11...

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