The balance in the Accumulated Amortization account represents the
a. cash fund to be used to replace capital assets.
b. amount to be deducted from the cost of the capital asset to arrive at its fair market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the capital asset.
The correct answer and explanation is:
The correct answer is d. amount charged to expense since the acquisition of the capital asset.
The Accumulated Amortization account is a contra asset account, which means it holds a balance that is subtracted from the original cost of a capital asset, typically an intangible asset like patents or copyrights. This account accumulates the total amount of amortization expense that has been recognized on the asset since it was acquired.
Amortization is the process of systematically allocating the cost of an intangible asset over its useful life. For example, when a company purchases a patent, the cost of the patent is spread out over its useful life, and the amortization expense is recognized periodically (often annually). This expense reduces the book value of the patent, which is recorded in the Accumulated Amortization account.
It’s important to note that the Accumulated Amortization account does not reflect the asset’s fair market value, nor does it represent a cash fund. The accumulated amount simply tracks the total amount of amortization that has been deducted from the asset’s value for accounting purposes. The asset’s net book value is calculated by subtracting the accumulated amortization from the original cost of the asset.
For example, if a patent was purchased for $10,000, and over time $2,000 of amortization has been charged to expense, the accumulated amortization would be $2,000. If the company were to sell the patent, the book value would be reduced to $8,000, even though the actual market value may differ.
This method ensures that the company’s financial statements reflect the declining value of intangible assets over time, allowing for more accurate financial reporting and matching of expenses with the periods in which they are incurred.