03 Sep What is Straight Line Amortization?
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DefinitionStraight line amortization is a method of allocating interest or charging a cost at a consistent rate over a period. The principle of straight line amortization is used for:
- The allocation of interest on a bond issued by a company.
- The calculation of the monthly installments that are made to repay a loan.
- Charging off the cost of an intangible asset.
What does straight line amortization mean?Let us review how the principle of straight line amortization applies in the three situations mentioned above.
- The allocation of interest on a bond issued by a company
The company will need to pay interest on the face value of $1,000, and not on the discounted issue price. It will also need to amortize the bond discount amount. By using the straight line amortization method, the company will write off the bond discount in equal amounts over the life of the bond. If the bond issue discussed here were a 5-year bond, the discount of $50 would have been written off at the rate of $10 every year for five years by using the straight line amortization method.
- The calculation of the monthly installments that are made to repay a loan
- Charging off the cost of an intangible asset