Which of the following methods of amortization is normally used for intangible assets if a pattern of use cannot be determined?
A Units of production
B Sum-of-the-years-digits
C Double-declining-balance
D Straight-line
The correct answer and explanation is:
The correct answer is D. Straight-line.
Explanation:
When amortizing intangible assets, there are different methods used depending on how the asset’s value is consumed over time. However, if a pattern of use or consumption cannot be determined, the straight-line method is typically used. The straight-line method is the simplest and most commonly used approach for intangible assets, especially when the asset’s usage or benefit cannot be directly linked to a specific pattern of time or output.
The straight-line method divides the cost of the intangible asset evenly over its useful life. This means that the same amount of amortization expense is recognized each year. For example, if an intangible asset like a patent costs $100,000 and has a useful life of 10 years, the amortization expense will be $10,000 per year. This method assumes that the asset provides an equal benefit over its entire life, and because there is no observable pattern of use, it offers a neutral approach to expense recognition.
Other methods of amortization, like units of production, sum-of-the-years-digits, and double-declining-balance, are typically used for tangible assets or cases where the consumption pattern of the asset is known or can be reasonably estimated. However, these methods are not suitable for intangible assets when the consumption pattern is uncertain.
For example, units of production is used when the amortization is based on the asset’s usage or output, such as for machinery. The sum-of-the-years-digits method accelerates the amortization expense, recognizing more in the earlier years of the asset’s life. The double-declining-balance method is another form of accelerated amortization, but none of these methods are typically applied to intangible assets when no clear usage pattern is identifiable.
In summary, when no pattern of usage can be determined for an intangible asset, the straight-line method is the most appropriate for amortization.