Fundamental Accounting Principles

Hi there,

Please see the attached Word document.

Amortization is a means of paying out a predetermined sum (the principal) plus interest over a fixed period of time, so that the principal is completely eliminated by the end of the term. This would be trivial if interest weren't involved, since one could simply divide the principal amount into a certain number of payments and be done with it. The trick is to find the right payment amount, which includes some principal and some interest. The math isn't celestial mechanics, but beyond the capabilities of the basic pocket calculator. For the curious, there's a mathematical presentation of the problem and its solution.
This calculator assumes that each payment should be the same amount, and that a payment consists of some amount for principal reduction and the interest calculated on the principal balance (including the principal part of the current payment). I have been told that some Canadian mortgages are not calculated using this method (anyone wanna give me some details?).
Amortization is used most often in mortgages (at least in the United States) and short-term loans, but the technique can also be applied to figure out how long it would take to pay off a given credit card debt (for example). In fact, this latter application was why I wrote the calculator in the first place.
Can you describe the data entry fields?
Principal
For loans, this is the amount that's borrowed, the amount which will be paid off by the end of the amortization period.
Annual Interest Rate
I haven't been able to get a clear definition from anyone yet, but I believe this is what is typically referred to as the APR (annual percentage rate). Many times you may be quoted a different rate (typically lower, don't you love marketing?) than the APR. In any case, this value is divided by the Payments per Year to obtain a periodic interest rate which is actually used in the amortization calculations.
Payments per Year
This should be self-explanatory. Monthly payments would by indicated by 12 Payments per Year, twice monthly payments by 24, etc. For payments every 2 weeks, enter 26, but beware that this is an approximation, since every 10 years you'll actually make 27 payments in the course of one calendar year. A similar caveat applies to any schedule based on any multiple of weekly payments because a calendar year contains just slightly more than 52 weeks, not to mention the additional complications of leap years.
Number of Regular Payments
The number of payments, combined with Payments per Year defines the term of the loan. If you're looking at a 30-year mortgage with monthly payments, you'd enter 360 into this field (12 × 30). I call these regular payments to distinguish them from the optional Balloon Payment.
Payment Amount
This is the amount one would pay every regular payment period.
Balloon Payment
This is an optional field. Some loans are set up so that there's a lump sum paid at the end of the term, most of it principal, but typically some interest component as well. If you are running a balloon scenario, just enter the amount of the balloon payment in this field. If the field is blank, the calculator will assume that there is no balloon amount involved.

Source: http://ray.met.fsu.edu/~bret/amortfaq.html#two

Q12-7--GAAP re amortization & writedown of intangibles

The cost of intangible assets should be amortized in the income
statement over the period benefited (not necessarily the maximum
or legal life of the assets).

The maximum period for amortization of intangible assets is 40
years.

If there is reasonable evidence that an intangible asset's
undiscounted future cash flows are less than its carrying value, it
should be written down to fair value, and the loss taken to the
income statement in the current period.

Source: http://www.roycarson.com/Chapter_12-practice_homework.htm

Journal Entries :

Sale of land :

DR : Cash 11,400
DR : Loss on sale 1,600
CR : Land 13,000

Patent Payment :

DR : Patent 68,000
CR : Cash 68,000

Amortization of patent on a straight line basis over 40 yrs
68,000 / 40 = 1,700 per yr

DR: Amortization Expense 1,700
CR: Accumulated Amortization 1,700

Capitalization of cash expenditures

DR: Amortization Expense 3,200
CR: Accumulated Amortization 3,200

DR: Maintenance expense 1,800
CR: Cash 1,800

Sale of Vehicle

DR: Cash 9,000
CR: Vehicle 9,000

Purchase of Business

DR: Land 40,000
DR: Buildings 200,000
DR: Equipment 100,000
DR: Loss on purchase 50,000
CR: Cash 320,000
CR: Long term debt 70,000

Amortization of Goodwill

Goodwill is the difference between the amount that you paid for the assets and the fair market value of your net assets. The net assets in this instance are 270,000, thus the difference is 50,000. Amortized over 40 yrs, we get 1,250 per year.

Assets Liabilities Net Income
11,400 11,400
-68,000 -68,000
-1,700 -1,700
-3,200 -3,200
-9,000 -9,000
-1,800 -1,800
320,000 320,000
40,000
200,000
100,000
-70,000

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