Majority of the candidates attempted this question on distinction, examples of depreciation and amortization and factors to be considered in computing annual depreciation of a fixed asset.  Candidates’ responses to this questions showed their understanding of the concept of depreciation and amortization accordingly. Below are some of the suggested responses:

• i     Distinction between Depreciation and Amortization:

Depreciation is:

• the reduction in the economic value of a fixed tangible/non-current asset as a result of wear, tear, usage, effluxion and passage of time; 

• that part of the cost of a fixed tangible/non-current asset consumed during its period of use by the firm.

                        while;
Amortization is;

• the measure of the fall in value of a fixed intangible assets due to passage of time and actions of competitors;     

• a charge on intangible fixed assets with fixed determinable legal life;

• the spread of the cost of an intangible asset over its useful life.                                     

            (a) ii Examples of assets associated with:

Depreciation

• Plant and machinery
• Furniture and fittings
• Motor vehicle
• Office equipment
• Buildings.

Amortization

• Patents
• Copyrights
• Leases
• Brands
• Royalties
• Franchise
• Trademarks

(b)Factors that must be considered in computing annual depreciation of a fixed asset

• Cost of the asset:

This is made up of the invoice price and other related costs that are necessary to bring the asset to its present position such as freight, installation and legal charges.

• The estimated useful life of the asset:

It is the number of years the fixed asset is expected to be put into economic use in it income earning capacity.

• The scrap/residual/salvage value of the asset:

It refers to the amount or value at which the fixed asset may be disposed of after a number of years of usage.

• The method of depreciation chosen:

The method of depreciation to be used will be determined by management depending on the nature of the asset and the firm’s policy.