Updated July 15, 2023
Definition of Carrying Amount
The carrying Amount is the amount for an asset reflected in the books after the depreciation deduction. There are several assets that a company purchases. All the assets have different depreciable life. So the value of each asset after depreciation in the books is termed as the Carrying amount of the asset.
Explanation
An asset’s value in the market is not the same as its value in a company’s books, as its depreciation accounts for each year, and its carrying amount changes. The profit or loss from the sale of an asset calculates based on the asset’s carrying amount.
How to Calculate Carrying Amount?
- Step 1: The asset record at its purchase price in a company’s balance sheet. So whenever an asset is purchased, cash moves out of the company, and the asset adds.
- Step 2: Assets have a depreciable life. The management of the company estimates the depreciable life and salvage value. It helps a company to keep track of the assets for the proper functioning of the business. If an asset is about to end, it must replace to maintain production.
- Step 3: At the end of the Financial Year, the asset’s depreciation deductions from the purchase price. The residual value is called the carrying amount.
Formula:
Example of Carrying Amount
A piece of machinery was purchased for $10,000. The depreciable life of the machine is considered to be for 10 years. At the end of 10 years, the salvage value of the machine will be $2,000.
Calculate the carrying amount at the end of year 2.
Solution:
- Depreciation per Year = (10,000 – 2,000) / 10
- Depreciation per Year = 800
So per Year, depreciation will be $800. See Excel for the Carrying amount calculation. The carrying amount at the end of Year 2 is 8,400.
Carrying Amount of Investment
Investments are done to make money. They don’t depreciate like normal Fixed Assets (Ex: Machinery). Investments can be Current or Long term. Current Investments are investments in Financial Securities that are supposed to be sold quickly. So the carrying amount of the current securities will be lower than the Fair Value or Cost of the asset. Fair Value is the asset value the informed buyer and seller agree to trade with. In the case of Long Term assets, the carrying value is usually the cost of the investment. If there is a decline in the asset’s value, the carrying value records at a reduced value.
Carrying Amount of Debentures
Debentures are fixed income securities that are purchased to receive fixed payments. If a company has bought a debenture at a premium, then the debenture’s purchase price will be recorded in the books. At the end of the maturity of the asset, the company will receive the Face Value of the debenture. Still, the company paid premium money to buy the debenture, so the carrying value of the asset will be:
If the purchase price of a debenture is $1,050 and the face value is $1,000. Then the company has paid a premium of $50 to purchase the debenture as the company will receive $1,000 at maturity. Say the maturity of the debenture is in 10 years. So the premium of $50 will have to amortize in 10 years.
Per Year Amortisation of Premium calculates as
- Per year Amortisation of Premium = 50 / 10
- Per Year Amortisation of Premium = 5
The Carrying Value of the Debenture calculates as
- Carrying Value of Debenture = 1,050 – 5
- Carrying Value of Debenture = 1,045
So the carrying value of the debenture after year 1 is $1,045. Similarly Carrying value of debentures can be found for bonds purchased at a discount.
Carrying Value vs Market Value
Carrying Value is the value that is reflecting in the books after the deduction of depreciation. Market value is the value of the prevailing asset in the market. If an asset has a carrying value of $500 and its market value is $700. So there will be a profit of $200 if the company sells the asset in the market.
Profit calculates as
Profit = Market Value – Carrying Value
- Profit = $700 – $500
- Profit = $200
So carrying value is the value of the asset as per books. Whereas market value is the value at which the asset trades in the market.
Advantages
Some of the advantages are given below:
- Carrying amount help managers and other stakeholders to draw a conclusion regarding the quality of the firm’s assets. Suppose the carrying value of all the assets are very less. In that case, the company’s asset position is weak, and capital expenditure requires it to sustain its daily operations.
- Fair value is very subjective. Carrying the amount is a conservative way to show the value of assets in the balance sheet. If, instead of Carrying value, fair value was used, then many companies would have inflated profit by showing higher fair value for assets.
Conclusion
Carrying the Amount of different assets will be diverse as the depreciable life is not the same. A thorough analysis of carrying value by auditors must be performed as a company may show less depreciation to inflate profit. There are several tricks that companies perform on carrying value to save taxes. So proper checks should be performed to ensure the authenticity of the carrying value of assets.
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