CACC 414 CH11

CACC 414 CH11 - CACC100 CH11 Amortization is a means of...

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CACC100 CH11 Amortization 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 Residual Value is defined as the estimated net realizable value of an item of PPE at the end of its useful life to an entity = amount that the asset is eventually amortized = amount that the asset is written down to during its useful life Salvage Value is the asset’s estimated net realizable value at the end of its life Amortizable amount is the amount to be amortized = MAX (original cost of the asset – residual value, original cost of asset – salvage value) A capital asset’s useful life is the period during which the asset is expected to contribute economic benefits to the organization Useful Life ≠ Physical Life Is affected by: 1) Inadequacy - Results when an asset stops being useful due to a change in demands 2) Supersession - Replacement of one asset with a more efficient asset 3) Obsolescence - All other reasons 4) Wear and Tear METHODS OF COST ALLOCATION (Amortization) 5 METHODS 1. Activity Methods (Variable Change Approach) 2. Straight-Line Method 3. Decreasing Charge (or Accelerated) Methods - Declining balance - Sum-of-the-years’-digits (Method 4 and 5 were not discussed in lecture notes, it is in text book: page 645-649) 4. Increasing Charge Methods 5. Special Depreciation methods - Group and Composite Method
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CACC100 CH11 - Hybrid or Combination methods Crane Ltd. buys equipment at the beginning of the current fiscal year Cost: $500,000 Estimated useful life: 5 years (or 30,000 hours) Residual value: $50,000 Actual hours used during the 1) current year: 4,000 hours 2) next year: 4,700 hours Activity Method determines amortization according to usage/productivity instead of the passage of time Asset’s life = (output it provides) or (input required to produce the output) Amortization Charge = Straight Line Method is a function of the passage of time Amortization Charge = Method’s Assumption: 1) Asset’s economic usefulness is the same each year
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This note was uploaded on 03/27/2012 for the course ACC 414 taught by Professor Unknown during the Winter '09 term at Ryerson.

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CACC 414 CH11 - CACC100 CH11 Amortization is a means of...

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