Chapter 10 Amortization

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Chapter 10Amortization
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FACTORS IN CALCULATING AMORTIZATION
Illustration 10-6
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AMORTIZATION METHODS

• Three methods of recognizing amortization are
  1. Straight-line, 2. Units of activity, and
  3. Declining-balance. Each method is
  acceptable under generally accepted accounting
  principles. Management selects the method that
  is appropriate for their company. Once a method
  is chosen, it should be applied consistently.

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STRAIGHT-LINE METHOD
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STRAIGHT-LINE METHOD

• Amortization is constant for each year of the
  asset's useful life

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DECLINING-BALANCE METHOD

• The calculation of periodic amortization is based
  on a declining net book value (cost less
  accumulated amortization) of the asset.
• The amortization rate remains constant from year
  to year, but the net book value to which the rate
  is applied declines each year.

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DECLINING-BALANCE METHOD

• Accelerated methods result in more amortization
  in early years and less in later years

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UNITS-OF-ACTIVITY METHOD

• To use the units-of-activity method,
• 1) the total units of activity for the entire
  useful life are estimated,
• 2) the amount is divided into amortizable cost
  to calculate the amortization cost per unit, and
• 3) the amortization cost per unit is then
  applied to the units of activity during the year
  to calculate the annual amortization.

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UNITS-OF-ACTIVITY METHOD

• Useful life is expressed in terms of total units
  of production or activity expected from the asset
  

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REVISING PERIODIC AMORTIZATION

• If annual amortization is inadequate or
  excessive, a change in the periodic amount should
  be made.
• When a change is made,
• 1. there is no correction of previously
  recorded amortization expense and
• 2. amortization expense for current and
  future years is revised.

Revised amortization expense Net book value at
time of revision revised salvage
value Remaining useful life
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EXPENDITURES DURING USEFUL LIFE

• Ordinary repairs are expenditures to maintain
  the operating efficiency and expected
  productive life of the capital asset.
• They are debited to Repairs Expense as incurred
  and are often referred to as operating
  expenditures.
• Additions and improvements are costs incurred to
  increase the operating efficiency,
  productive capacity, or expected
  useful life of the capital asset.
• 1. Expenditures are usually material in amount
  and occur infrequently during the
  period of ownership.
• 2. Since additions and improvements increase the
  companys investment in
  productive facilities, they are
  debits to the capital asset affected, and are
  referred to as capital
  expenditures.

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CAPITAL ASSET DISPOSALS

• Capital assets may be disposed of by
• a) retirement
• b) sale, or
• c) exchange

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CAPITAL ASSET DISPOSALS
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• Amortization for the fraction of the year to the
  date of disposal must be recorded
• Amortization expense xxx
• Accumulated amortization xxx
• Calculate net book value
• Net book value
• Cost - accumulated amortization

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CAPITAL ASSET DISPOSALS

• Compare net book value to sale proceeds
• Proceeds gt Net book value gain (cr.)
• Proceeds lt Net book value loss (dr.)
• Record disposition, removing cost of asset and
  accumulated amortization, and record proceeds (if
  any) and gain or loss on disposition (if any)

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Cash xxx Accumulated amortization xxx Capit
al asset xxx Gain on disposal xxx
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NATURAL RESOURCES

• Natural resources consist of standing
  timber and underground deposits
  of oil, gas, and minerals.
• Natural resources, frequently called wasting
  assets, have two distinguishing characteristics
• 1. They are physically extracted in
  operations.
• 2. They are replaceable only by an
  act of nature.

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ACQUISITION COST

• The acquisition cost of a natural resource is the
  cash or cash equivalent price necessary to
  acquire the resource and prepare it for its
  intended use.
• If the resource is already discovered, cost is
  the price paid for the property.

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AMORTIZATION

• The units-of-activity method is generally used to
  calculate amortization, because periodic
  amortization generally is a function of the units
  extracted during the year.

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ILLUSTRATION 10-23
FORMULA TO CALCULATE AMORTIZATION EXPENSE
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ILLUSTRATION 10-24STATEMENT PRESENTATION OF
AMORTIZATION

• Accumulated Amortization, a contra asset
  account, is deducted from the cost of the natural
  resource in the balance sheet as follows