Page 48 - Microsoft Word - 00 IWB ACCA F7.docx

Chapter 3

Example 1

Amortisation

A company develops a new product at a cost of $400,000. It is anticipated
that the product will experience high demand for a period of four years.

Annual sales of the product for the next four years, totalling $16 million, are
forecast to be:

$m

Year 1 3.0

Year 2 4.5

Year 3 6.0

Year 4 2.5

Explain how the development cost could be amortised.

Solution

The development expenditure could be written off in one of two ways:

1 Amortise on a straight-line basis over four years, $400,000 × ¼ =
$100,000 p.a.

2 Amortise in relation to total sales:
3
Year 1 $400,000 × / 16 = $75,000

4.5
Year 2 $400,000 × / 16 = $112,500
6
Year 3 $400,000 × / 16 = $150,000
2.5
Year 4 $400,000 × / 16 = $62,500

42