Amortization and Asset Valuation

Amortization and Asset Valuation

Residual Value in Amortization

• Residual value is an estimate of a capital asset's value at the end of its useful life.

Declining-Balance Method of Amortization

• The declining-balance method produces a decreasing amortization expense each period.

Management's Choice of Amortization Method

• Management should select the amortization method that best measures the capital asset's contribution to revenue over its useful life.

Units of Activity Amortization Method

• Units of activity is an appropriate amortization method when the productivity of the asset varies significantly from one period to another.

Net Book Value of a Capital Asset

• The net book value of a capital asset is the difference between the cost of the asset and the accumulated amortization to date.

Straight-Line vs. Double Declining-Balance Amortization

• Use of straight-line amortization in comparison to the double declining-balance method results in an equal amount of amortization over an asset's total useful life.

Fully Amortized Capital Asset Retirement

• When a fully amortized capital asset is retired, the capital asset's original cost equals its book value.

Land Improvements Amortization

• Land improvements should be amortized over the useful life of the land improvements.

Accumulated Amortization Account Balance

• The balance in the Accumulated Amortization account represents the amount charged to expense since the acquisition of the capital asset.

Net Book Value Calculation

• The net book value of an asset is equal to the asset's cost less accumulated amortization.

Straight-Line vs. Double Declining-Balance Method (Amortization in Early Years)

• Use of straight-line amortization in comparison to the double declining-balance method results in a greater amount of amortization in the earlier years of an asset's useful life.