Nearest month or half-year — a policy; a revision changes the future only

Bought in April, not January

Assets are not bought on 1 January to suit the bookkeeper. Suppose Northlake Nordic Centre Inc. had bought the snowcat on 1 April. The first year owns it for nine months, and the case tells you how to count them — the partial-year convention is a company policy, and the paper states it.

Nearest month. Charge the months owned: straight-line 27,000 × 9/12 = 20,250. Under DDB, 60,000 × 9/12 = 45,000 in year 1 — and then year 2 is a full year at 40 % of the reduced carrying amount: (150,000 − 45,000) × 40 % = 42,000. The fraction applies once, to the first year; after that the schedule runs on whatever carrying amount is left. Re-using 9/12 in year 2 is the error to avoid.

Half-year convention. Whatever the purchase date, charge half a year in the year of acquisition (and, typically, half in the year of disposal): 27,000 × 1/2 = 13,500. A company with many small assets uses it to avoid tracking dates; the paper will say so.

Full year. Some cases charge a full year on anything owned at year end and nothing in the year of disposal. Rare, and again the case decides.

The method does not change the total — 135,000 will still be expensed — it changes which calendar year gets the first slice. And an asset bought in October is never assumed to have a full year’s charge: read the policy, then apply it.

The estimate changes

Every amortization schedule rests on two guesses — useful life and residual value — and guesses get revised. Northlake’s lodge (Building, cost 610,000, residual 70,000, 40 years) has been charged 13,500 a year. After five full years accumulated amortization is 67,500 and the carrying amount 542,500. A roof survey now says the building has 30 more years, not 35, and will be worth 62,500 at the end, not 70,000.

The rule is prospective: the change affects this year and future years only. Nothing about the past five years is restated — they were right on the facts then known, and a change in estimate is not an error. The new annual charge spreads what is left over what is left:

$$\text{Revised annual amortization}=\frac{\text{Carrying amount now}-\text{New residual}}{\text{Remaining life}}=\frac{542,500-62,500}{30}=16,000$$

From year 6 on the lodge is charged 16,000, and at the end of year 6 its carrying amount is 542,500 − 16,000 = 526,500. The 13,500 figure is dead; and there is no catch-up entry to Retained Earnings — the two mark-losing alternatives are keeping the old charge and “fixing” the prior years.

The same rule for a revised life only

A truck (Vehicles) bought 1 October for 64,000, residual 4,000, five years, nearest month: year 1 = 12,000 × 3/12 = 3,000, year 2 = 12,000. If at the end of year 2 (carrying amount 64,000 − 15,000 = 49,000) the owner decides only two more years remain, residual unchanged, the new charge is (49,000 − 4,000) ÷ 2 = 22,500 a year. Same formula, whichever estimate moved.