The fact that generally accepted accounting principles allow
companies flexibility in choosing between certain allocation
methods can make it difficult for a financial analyst to compare
periodic performance from firm to firm.
Suppose you were a financial analyst trying to compare the
performance of two companies. Company A uses the
double-declining-balance depreciation method. Company B uses the
straight-line method. You have the following information taken from
the 12/31/2021 year-end financial statements for Company
B:
| Income Statement | |||
| Depreciation expense | $ | 12,500 | |
| Balance Sheet | ||||
| Assets: | ||||
| Plant and equipment, at cost | $ | 125,000 | ||
| Less: Accumulated depreciation | (50,000 | ) | ||
| Net | $ | 75,000 | ||
You also determine that all of the assets constituting the plant
and equipment of Company B were acquired at the same time, and that
all of the $125,000 represents depreciable assets. Also, all of the
depreciable assets have the same useful life and residual values
are zero.
Required:
1. In order to compare performance with Company A, estimate what B's depreciation expense would have been for 2021 if the double-declining-balance depreciation method had been used by Company B since acquisition of the depreciable assets.
2. If Company B decided to switch depreciation
methods in 2021 from the straight line to the
double-declining-balance method, prepare the 2021 journal entry to
record depreciation for the year, assuming no journal entry for
depreciation in 2021 has yet been recorded.
Homework Answers
ANS:
1. 2018 - $1,25,000*10% = $12,500*2 = $25,000.00
2019 - $1,00,000*10% = $10,000*2 = $20,000.00
2020 - $80,000*10% = $8,000*2 = $16,000.00
2021 - $64,000*10% = $6,400*2 = $12,800.00
2. Accumulated Depreciation A/c Dr. $23,800.00
Plant & Machinery Cr. $23,800.00
(being Additional depreciation for 2018-19-20-21 has been claimed in 31.03.2021)
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double-declining-balance to straight-line. Depreciation prior to
2017 under double-declining-balance was $82,300, whereas
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Riverbed’s depreciable assets had a cost of $252,700 with a $43,200
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assets (Equipment). (Credit account titles are
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manually. If no...
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double-declining-balance to straight-line. Depreciation prior to
2017 under double-declining-balance was $97,100, whereas
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Grouper’s depreciable assets had a cost of $254,300 with a $42,000
salvage value, and an 8-year remaining useful life at the beginning
of 2017.
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assets (Equipment). (Credit account titles are
automatically indented when amount is entered. Do not indent
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