Amortization Flashcards
(26 cards)
-it is paying off a debt overtime in equal installments.
-part of each payment goes toward the loan principal, and part goes toward interest.
-as the loan amortizes, is the amount going toward principal starts cat small and gradually grows larger month and month.
Amortization
What does amortization refer to?A) Increasing the value of an asset
B) Reducing the value of an asset over time
C) Transferring an asset to another entity
D) None of the above
Answer: B) Reducing the value of an asset over time
Which of the following is an example of amortization?
A) Paying off a mortgage over time
B) Increasing the value of inventory
C) Selling an asset at a higher price
D) Renting a property for a fixed period
Answer: A) Paying off a mortgage over time
What type of assets are typically subject to amortization?
A) Tangible assets
B) Intangible assets
C) Financial assets
D) Current assets
Answer: B) Intangible assets
How is amortization expense calculated for an intangible asset?A) Initial cost divided by useful life
B) Initial cost multiplied by useful life
C) Initial cost minus salvage value
D) None of the above
Answer: A) Initial cost divided by useful life
Which financial statement reflects the amortization expense?
A) Balance sheet
B) Income statement
C) Cash flow statement
D) Statement of retained earnings
Answer: B) Income statement
True or False:
Amortization always results in a cash outflow.
A) TrueB) False
B. False
What is the purpose of amortization in accounting?
A) To record the depreciation of tangible assets
B) To allocate the cost of intangible assets over their useful life
C) To determine the market value of an asset
D) None of the above
Answer: B) To allocate the cost of intangible assets over their useful life
Which method of amortization evenly allocates the cost of an asset over its useful life?
A) Straight-line method
B) Double-declining balance method
C) Units of production method
D) Sum-of-the-years’-digits method
Answer: A) Straight-line method
Which financial ratio is impacted by amortization?
A) Debt-to-equity ratio
B) Current ratio
C) Return on investment
D) Gross profit margin
Answer: A) Debt-to-equity ratio
What is the effect of amortization on the book value of an asset over time?
A) Increases the book value
B) Decreases the book value
C) Does not impact the book value
D) Initially increases, then decreases the book value
Answer: B) Decreases the book value
Which type of intangible asset is typically not subject to amortization?
A) Patents
B) Goodwill
C) Trademarks
D) Copyrights
Answer: B) Goodwill
In the context of loans, what does amortization refer to?
A) Repayment of the principal loan amount over time
B) Payment of interest only
C) Extending the loan term
D) None of the above
Answer: A) Repayment of the principal loan amount over time
Which of the following assets is NOT subject to amortization?
A) Land
B) Machinery
C) Patents
D) Software
Answer: A) Land
Which financial statement shows the remaining balance of an intangible asset after amortization?
A) Balance sheet
B) Income statement
C) Statement of cash flows
D) Statement of retained earnings
Answer: A) Balance sheet
How does amortization differ from depreciation?
A) Amortization is for tangible assets, while depreciation is for intangible assets.
B) Amortization is for intangible assets, while depreciation is for tangible assets.
C) They both refer to the same process.
D) None of the above
Answer: B) Amortization is for intangible assets, while depreciation is for tangible assets.
Which method of amortization results in a higher expense in the earlier years of an asset’s life?
A) Straight-line method
B) Double-declining balance method
C) Units of production method
D) Sum-of-the-years’-digits method
Answer: B) Double-declining balance method
What happens to the amortization expense if the useful life of an intangible asset is increased?
A) Amortization expense decreases
B) Amortization expense increases
C) Amortization expense remains the same
D) It depends on the method used
Answer: A) Amortization expense decreases
How does amortization affect the net income of a company?
A) Increases net income
B) Decreases net income
C) No impact on net income
D) Increases initially, then decreases net income
Answer: B) Decreases net income
Which factor does NOT impact the calculation of amortization expense?A) Salvage value
B) Useful life
C) Initial cost
D) Market value
Answer: D) Market value
In what section of the cash flow statement would amortization be reported?
A) Operating activities
B) Investing activities
C) Financing activities
D) Non-cash activities
Answer: A) Operating activities
Company X purchased a patent for $500,000 with an estimated useful life of 10 years and no salvage value. Calculate the annual amortization expense using the straight-line method.
A) $50,000B)
$45,000
C) $55,000
D) $60,000
Correct Answer: A) $50,000
Solution: Amortization expense = (Cost of the patent - Salvage value) / Useful life = ($500,000 - $0) / 10 years = $50,000 per year
A company has an intangible asset with a book value of $600,000 and an annual amortization expense of $80,000. What will be the remaining book value after 5 years?
A) $360,000
B) $200,000
C) $400,000
D) $200,000
Correct Answer: A) $360,000
Solution: Remaining book value = Initial book value - Total amortization expense = $600,000 - ($80,000 * 5) = $600,000 - $400,000 = $200,000
A corporation acquired a software license for $300,000 with a useful life of 5 years and a salvage value of $30,000. Calculate the amortization expense for the first year using the double-declining balance method.
A) $72,000
B) $54,000
C) $96,000
D) $60,000
Correct Answer: C) $96,000
Solution: Double-declining balance rate = 1 / Useful life = 1 / 5 = 20%. Amortization expense = Book value at the beginning * Double-declining balance rate = $300,000 * 20% = $60,000 for the first year. Since it’s double declining, the expense remains the same in the first year.
