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Amortization of Assets
Amortization is a method of debt reduction in which a borrower pays off a portion of the interest and principal periodically, meaning in regular installments over a specific and predetermined period of time. The formula for calculating the amortization on an intangible asset is similar to the one used for calculating straight-line depreciation. Divide the initial cost of the intangible asset by the estimated useful life of the intangible asset. For example, if it costs $10,000 to acquire a patent and the patent has an estimated useful life of ten years, the amortized amount equals $1,000 per year.
The amount of amortization accumulated since the asset was acquired may be presented on a Balance Sheet as a reduction [a negative amount] shown just below the initial cost of the amortized asset.
Formula: Initial Cost / Useful Life = Amortization Rate Per Year.
For example, $10,000 / 10 = $1,000 per year where $10,000 is the initial cost and 10 years is the estimated useful life of the asset.
Amortization is more commonly used to by credit professionals to describe the method used to measure the consumption or use of an intangible asset such as a patent over the estimated useful life of that intangible asset. All intangible assets must be amortized using the straight line method. Amortization of intangible assets cannot exceed 40 years.
Edited by Michael C. Dennis. Michael's website is at www.coveringcredit.com