Straight-line, the contra account, the carrying amount

A long-lived asset is a very long prepaid

The groomer will work for six winters. Its cost is not an expense of the month it was bought, any more than the twelve-month policy was an expense of 3 December; it is spread over the years it serves. That spreading is amortization — ASPE's word (s.3061); IFRS and every American text say depreciation, and they mean the same thing.

Straight-line spreads the cost evenly:

$$\text{Annual amortization}=\frac{\text{Cost}-\text{Residual value}}{\text{Useful life}}$$

The residual value is what the asset is expected to be worth when the company is done with it; it is not amortised because it will come back. For a partial year, multiply by months owned ÷ 12.

Worked example — the groomer

Northlake's groomer: cost 96,000, residual 6,000, useful life six years, owned since 1 November. Year end 31 December.

$$\frac{96,000-6,000}{6}=15,000\text{ a year};15,000\times \frac{2}{12}=2,500$$

Dec 31  Amortization Expense                2,500
            Accumulated Amortization – Equipment          2,500
        Groomer, two months, straight-line.

The credit goes to Accumulated Amortization – Equipment, a contra-asset account — an asset-side account with a credit balance, which is why L4.1 insisted on deriving the rules rather than memorising them. Equipment itself stays at 96,000, the historical cost, for the asset's whole life. The balance sheet shows both and their difference, the carrying amount (also called net book value):

Equipment                                    96,000
Less: accumulated amortization                2,500
Carrying amount                              93,500

Crediting Equipment directly would give the same carrying amount but lose the cost and the accumulated total, and every later question — how old is the asset, what is the gain on disposal — needs those two numbers separately.

Two more, faded

The lodge. Cost 610,000, residual 70,000, forty years, owned two months: $(610,000-70,000)÷40=13,500$ a year, times $\frac{2}{12}$ = 2,250. Dr Amortization Expense 2,250 / Cr Accumulated Amortization – Building 2,250. Forgetting the residual gives $610,000÷40\times \frac{2}{12}=2,541.67$ — wrong. Land under the lodge is never amortised; it does not wear out.

Kettle Creek's equipment. Cost 35,000, residual 5,000, five years, a full year: $(35,000-5,000)÷5=$ 6,000. After two full years the accumulated amortization is 12,000 and the carrying amount $35,000-12,000=23,000$. Carrying amount is cost less accumulated amortization — not cost less residual, which is the depreciable amount, a different thing.