Capital Assets

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Unit
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Amortization
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AMORTIZATION

• Amortization is the process of allocating to
  expense the cost of a capital asset over its
  useful (service) life in a rational and
  systematic manner.
• Cost allocation is designed to provide for the
  proper matching of expenses with revenues in
  accordance with the matching principle.
• During an assets life, its usefulness may
  decline because of wear and tear or obsolescence.
• Land is the only capital asset that is not
  amortized.

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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
Amortization Expense Truck 2,400 Accumulated
Amortization Truck 2,400 To record
amortization on truck in year 1
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STRAIGHT-LINE METHOD

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

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STRAIGHT-LINE METHOD EXAMPLE
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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.

Rate (100/ life of asset) 2
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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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DECLINING-BALANCE METHOD EXAMPLE
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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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UNITS-OF-ACTIVITY METHOD EXAMPLE
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COMPARISON OF METHODS
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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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NATURAL RESOURCES
AMORTIZATION

• The units-of-activity method is generally used to
  calculate amortization on natural resources,
  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

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ACCOUNTING FOR INTANGIBLE ASSETS

• In general, accounting for intangible assets
  parallels the accounting for capital assets.
• Intangible assets are
• 1. recorded at cost
• 2. written off over useful life in a
  rational and systematic manner
• 3. at disposal, net book value is eliminated
  and gain or loss, if any, is recorded.

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AMORTIZATION OF INTANGIBLE ASSETS

• Amortizable intangible assets
• Have defined lives
• Allocation of the cost to expense over the
  shorter of
• Useful (economic) life
• Legal life
• Straight-line method of amortization used

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UNAMORTIZABLE INTANGIBLE ASSETS

• Indefinite useful lives
• Do not amortize
• Test for impairment

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