Question

northern airline purchased airline gate rights at newark international airport for $2,000,000 with a legal life of five years. however, northern intends and has the ability and right to extend the rights every ten years for an indefinite period of time. over what period of time should northern amortize the gate rights?.

Answer 1

Northern Airline should not amortize the gate rights as they have the ability to renew them indefinitely. The cost of the rights will remain in the balance sheet until there's evidence the asset will no longer be renewed or hold value.

Step-by-step explanation:

The period over which Northern Airline should amortize the airline gate rights at Newark International Airport depends on the useful life of the asset. The gate rights have a legal life of five years but Northern has the intention and the ability to extend these rights every ten years indefinitely.

Considering that these rights could be renewed indefinitely, the airline should amortize the gate rights over an indefinite period, which means not amortizing them at all until it becomes more certain that the asset will no longer be renewed or have value.