Review Iona Flowers Inc. –What’s the amortization method??

10.2b Amortization II Revising Amortization & Expenditures During Useful Life

A Tax Note CRA allows amortization expense deductions when calculating taxable income using Capital Cost Allowance (CCA) (amortization for tax purposes) Half year rule: in year of acquisition ½ CCA rate can be deducted See Text Pg. 472 ClassCapital Asset GroupCCA Rate Class 1Buildings4% Class 8Office Equipment20% Class 10Automobile30%

Revising Periodic Amortization Amortization is an estimation, may need adjusting if inaccurate Changes can be made for the current and future periods only (past was based on the best information available at the time) Revised Amortization Expense Net Book Value at time of Revision Revised Salvage Value Remaining Useful Life Net Book Value at time of Revision Revised Salvage Value Remaining Useful Life Net Book Value at time of Revision Revised Salvage Value

Net Book Value (NBV) Net Book value is the difference between the cost of an asset and the accumulated amortization to date NBV Cost of Asset Accumulated Amortization NBV Accumulated Amortization NBV

PRACTICE: Iona Flowers Try Part B

Iona Flowers Inc. After the first year, Iona Flowers Inc. decides that the estimated revenue of $30,000 each year was an inaccurate estimate. As the business is growing it is hard to predict when business will pick up. Iona Flowers Inc. has decided to switch to a units of activity amortization method based on 20,000 deliveries in the reminder of the assets useful life.

Iona Flower’s Revised Amor’t Amortizable cost = 45,000 – 5,000 – 10,000 = $30,000 Amortizable cost per unit = $30,000 = $ ,000 If there were 5,432 deliveries in 2009 the amortization expense would be: = $1.50 x 5,432 = $8,148

Expenditures During Useful Life Operating Expenditures Ordinary repairs are costs to maintain the operating efficiency and expected life Expense as incurred (maintenance, repair expense) Capital Expenditures Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected life of a capital asset Amortize over remaining useful life