accounting-amortization

Accounting Amortization Assignment Help

Q) 1. What is Amortization for Business?

Amortization is the procedure in which any organization or company takes the decision to lessen the prices/ value of the assets considered over their anticipated lifetime. This act can be considered as diminishing or promoting that part of the asset’s pricing which has become outdated and out-fashioned while in the course of earning profits and generating income for the company or the firm. Amortization is only concerned with the concrete and physical assets which can be termed as tangible assets, but also takes into consideration intangible assets which have indescribable value such as patents, trademarks and trade names etc.

There are numerous benefits for the organization, which can be stated to be used in the documentation and generation of more concrete and substantial statements expenses and gains. The payment of taxes can be stated as another significant benefit of amortization as amortization is considered as expense incurred by the business and hence it is tax deductible.

Q) 2. What is Amortization for Loans?

Amortization refers to the disbursement or payment of loans by doling out the total payable sum in equal amounts which are generally referred to as installments. These equal amounts or installments due to be payable at regular intervals of time generally payable along with an interest. The rate of interest usually pre-fixed at the time of taking the loans by the banks. While the total sum is being repaid back to the bank, first of all the interests is paid to the banks and then the principal amount in form of timely equal installments. The banks also determine a fixed time period in course of which the total amount has to be repaid to the bank. The amounts of the installments if fixed in such a manner which ensures that the sum total of principal and interest levied on the principal is paid well in the due course of time of repayment of installments if no defaults are made.

Q) 3. Working of Amortization?

There are 2 key points that should be kept in mind while working out amortization. They include:

Interest is usually paid on that amount of loan which has not been paid, i.e. the leftover amount of loan which has to be repaid back at any given time of the amortization period.

With the increase in the time taken to repay back the loan, the amount of interest which needs to be paid as interest also increases.

Q) 4. Formula for Amortization Periodic Amount

Question

Where,

M= stands for the amount of installments

P= stands for the principal loan amount

R= stands for the rate of interest

N= stands for the number of years/months. (loan period)

Q) 5. Example of Amortization of Loans

Let’s us take an instance where a loan of $12000 is borrowed at an interest rate of 5% for a period of 12 months. Let’s calculate the monthly payment and interest using the formula.

By substituting the respective values in this formula, M =

By calculating the above values, we get the monthly payment amount as $1027.29, wherein the fixed principle amount was $977.29 and interest as $50. Now the next interest which has to be repaid back will be calculated on the amount which is still to be repaid, which is also the leftover or remaining amount of the loan i.e. $11,022.71.

This formula can be used to calculate all the amounts due as installments well in advance basis the fact that the interest rate is generally fixed and does not change over the period of time. However, when we tend to work out all the leftover installments which are due to be paid for remaining amount of loan period, we will find that the amount of principal goes on an increasing trend and the interest rate goes the other way round, i.e. the interest rate decreases. However, this can be observed that the amount to be repaid as the installments remains the same and does not change over the period of time.

The total amount that has to be paid as interest can be calculated by subtracting the total principal amount payable from the total amount paid as mortgage loan repayment.

Q) 6. Amortization Schedule Calculator

The amortization schedule calendar aids one to divide the monthly amounts to be done as the principal amount and the interest amount. This will help in making the advance statement of the amount, principal and the interest that is required to be paid for the repayment of loan over a period of time.

Q) 7. Loan Repayment Strategies

✓ Additional Payments: Taking an instance where one takes a loan for a period of 10 years. One can decide to pay some extra or additional amount as the principal amount. In this way, one can be sure that the period of loan repayment is shortened and some interest which had to be otherwise paid is also saved.

✓ Payment Acceleration: In this case, one can consider to pay the installments more frequently, i.e. instead of paying the installments monthly or annually, one may decide to make the payments bi-monthly or bi-annually. This method will proffer the same benefits as offered by the additional payment strategy.

Q) 8. Amortization of Intangible Assets

Amortization of intangibles refers to the decrease or diminution in the value of intangible assets. This is typically written-off the value of the intangible asset which is expected over the estimated life of the asset.

Intangible assets essentially comprise of:

● Patents

● Copyrights

● Trademarks

● Customer lists

● Government licenses

Taking an instance of the same, consider a company is acquired by Marvels Ltd, which also has patents of the value of $10,000. In this scenario, Marvels Ltd, decides to amortize this asset for the next 5 years at a rate of $2000 annually. So considering the amortization of intangible assets, the value of patent will become $8000 and will not exist after a period of 5 years if the same terms of amortization are applied.