straight-line method of amortization

(noun)

debt paid off with regular, equal sized payments

Related Terms

  • intangible
  • straight-line method
  • amortization
  • asset

Examples of straight-line method of amortization in the following topics:

  • Limited-Life Impairment

    • Limited-life intangibles are amortized throughout the useful life of the intangible asset using either the units of activity or the straight-line method.
    • As a result of the impairment, the amortization expense on the patent should be adjusted to reflect the new value.
    • Intangible assets with a limited-life are amortized on a straight-line basis over their economic or legal life, based on whichever is shorter.
    • Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method.
    • A bond's discount amount must be amortized over the term of the bond.
  • Copyrights

    • Since a copyright eventually terminates, it is amortized.
    • The business will record an amortization expense to reflect the decrease in the asset's value.
    • Generally, an intangible asset like a copyright is amortized via the straight-line method.
    • This means that the book value of the copyright is divided by the useful life of the copyright to determine the amortization amount.
    • Every year, the amortization amount is subtracted from the value of the copyright and is listed as an expense.
  • Depreciation

    • If straight-line depreciation is used, what will be the annual depreciation expense?
    • The straight-line method of depreciation reduces the book value of an asset by the same amount each period.
    • Straight-line depreciation is the simplest and most-often-used technique .
    • The economic reasoning behind the straight-line method involves the acceptance that depreciation is an approximation of the rate at which an asset transfers value to the operations of a business.
    • The most commonly used rate is double the straight-line rate.
  • Amortization of Intangible Assets

    • The costs of intangible assets with identifiable useful lives are amortized over their economic/legal life.
    • Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter.
    • The annual expense recognized as a result of straight line amortization is simply the cost of the intangible asset divided by the number of years in it's estimated useful life.
    • The amortization expense recognized each year will be the same, and the value of the intangible asset will be 0 at the end of its useful life
    • Goodwill is an example of an intangible asset that has an indefinite useful life, and is therefore tested for impairment on an annual basis as opposed to being amortized on a straight line basis.
  • Analyzing Intangible Assets

    • Intangibles with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter.
    • Those with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever one is shorter.
    • Trademarks and goodwill are examples of intangible assets with indefinite useful lives.
    • Goodwill has to be tested for impairment rather than amortized.
    • Research and development (R&D) costs are not in and of themselves intangible assets.
  • Direct and Indirect Measurement

    • When understanding how an organization creates a statement of cash flows, it's important to know there are two established methods: the direct method and the indirect method.
    • As the name implies, the direct method of reporting cash flows identifies clear circumstances of cash inflow or outflow.
    • It is a simpler, more straight forward approach to cash flows, where each line item is a tangible form of cash credit or debit.
    • Let's take a look at some examples of indirect cash flow line items for context:
    • Operating items in the indirect method include depreciation and amortization, accounts receivable, inventory, and operating gains and losses.
  • Market Value vs. Book Value

    • For assets, the value is based on the original cost of the asset less any depreciation, amortization, or impairment costs made against the asset.
    • 4 Depreciation methods (1.
    • Straight-Line method, (2.
    • Double-Declining Balance method, (3.
    • Sum-of-the-Years' Digits method, (4.Productive output method)
  • Other Expenses

    • Methods of computing depreciation may vary by asset for the same business.
    • Methods and lives may be specified in accounting and/or tax rules in a country.
    • Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods.
    • When used in the context of a home purchase, amortization is the process by which loan principal decreases over the life of a loan.
    • An amortization table shows this ratio of principal and interest and demonstrates how a loan's principal amount decreases over time.
  • Accounting Methodologies: Amortized Cost, Fair Value, and Equity

    • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
    • Held to maturity securities are reported at amortized cost less impairment.
    • Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies.
    • In the investor's income statement, the proportional share of the investee's net income or net loss is reported as a single-line item.The ownership of more than 50% of voting stock creates a subsidiary.
    • Explain the difference between amortized cost, fair value and the equity method for reporting debt securities
  • Indefinite-Life Impairment

    • Because Indefinite-life tangibles continue to generate cash they can't be amortized; they must be evaluated for impairment yearly.
    • These items are amortized on a straight-line basis over their economic or legal life, whichever is shorter.
    • Indefinite-life tangibles are not amortized because there is no foreseeable limit to the cash flows generated by those intangible assets.
    • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.
    • Increases in value in excess of prior impairment loss is debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet.
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