At the end of the journal entries to be made, it states: Information for adjusting entries:

1. The equipment had a useful life of 8 years, with no residual value after 8 years.

So if the equipment was worth 60,000 at the end of 2005, and the journal entries are for the end of 2006, would you just do 60,000/8 years to get the amortization expense for one year?

amortization expense 7500
accumulated amortization 7500

2. Similar scenario with vehicles having a useful life of 5 years and a residual value of 5000 at the end of 5 years. Im not sure what you would do for this because of the residual value.

CaptainForest

1)
You would only do 60,000 / 8 assuming that the 60,000 represents the Gross Value of the equipment and has not been netted for accumulated amortization.

If the information you provided is all that you have, then I would say you did it correct.

2)
If you have a vehicle worth 25,000 over 5 years with a residual of 5 years…..

What you would do is.

25,000 – residual 5,000 = 20,000 to be amortized

20,000 / 5 = 4,000 per year in amortization expense

morgaine300

Since when do you "amortize" plant assets? They are depreciated. Do you have a textbook actually saying to use amortization expense?

This is also based on the assumption that this is straight-line depreciation. Does it say that?

CaptainForest

Morgaine, what that directed at me?

First, I was assuming straight line…which is true, is not something that I should have just assumed.

Second (your first point)….

Assets are no longer “depreciated”, they are amortized.

The theory is because amortized is a better word that reflects what is happening. Because the asset could “appreciate” over time.

You amortize, spread the cost over a number of periods, as oppose to expensing it all right away in the period you buy it.

So if the asset is to be used for 5 periods, spread the cost out, or amortize it over 5 years/periods.


But then I shouldn’t necessarily say that everyone says amortize, as I don’t know what every jurisdiction in the entire world says.

But here in Canada, and international standards (which we are all moving towards….Europe being more closely there), even the US….are there.


Now, all that being said, it is not wrong to use the word depreciation, and many still do. But they would prefer people to say amortization as that is more reflective of what is really happening. While most of the time the asset does depreciate, it can appreciate.


In regards to Canadian GAAP….see CICA section 1000 .51A.

That section says, “ When economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined, expenses are recognized in the income statement on the basis of systematic and rational allocation procedures. This is often necessary in recognizing the expenses associated with the using up of assets such as property, plant, equipment, patents and trademarks. In such cases, the expense is referred to as depreciation or amortization. These allocation procedures are intended to recognize expenses in the accounting periods in which the economic benefits associated with these items are consumed or expire.”


In summary. Call it whichever term you wish, it is the same thing.

morgaine300

The question wasn't really directed at anyone in particular, but probably more towards the OP.

Granted, I've been mostly teaching the last 5 years and haven't kept up with a lot of stuff, but the textbooks themselves do pretty well keep up. Even in the newest editions, I've never yet seen a textbook call it amortization. Even though this could most definitely be regional, I also tutor online and work with students all over the country using a wide variety of textbooks. And yet this is the very first time I've ever heard depreciation being called amortization.

i.e. thus far haven't seen it in the U.S. though it may be coming. (As I said, over the past few years I haven't been that great at keeping up with current changes, simply cause I don't work "out there" anymore. These days I'm more comfortable with textbook than real life. But... when FASB changes something, it reflects in the textbooks.)

I'll keep calling it depreciation until they make me change. :-) Given the reasoning behind it, since we still do everything based on cost and do not account for appreciation in assets (except recording current values of securities), I don't really much see the point. If we don't change the way we record assets, depreciation still is just creating a book value on the books, which does not necessarily reflect any kind of market value. Calling it something else really won't change that. Seriously, I don't see the point. (Although this is not true of some countries.)

CaptainForest

Textbooks always take forever to change, and since they don’t have to change, they won’t. Since it is still acceptable to call it depreciation.

The simple rationale was to spread the cost of an item to many periods, regardless if the assets depreciated or appreciates.

But heck, in the end it does not really matter, the concept is the exact same.

morgaine300

Just for "fun," I went to FASB's site and was trying to find this. Unfortunately there's just so much stuff it's hard to locate any one thing. So I searched both depreciation and amortization and found no mention of this at all. I think the newest date was late '07 and still no mention of it.

It does sort of remind me that I don't keep up with current changes very well. (Especially since most of them involve odd things that I never get into, like gas & oil.) When I have time I'm going to download this stuff and try to get it organized and try to look over the recent years.