Question

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 $ 13,500 expense $135,000 Balance Sheet Assets: Plant and equipment, at cost Less: Accumulated depreciation Net (54,000) $ 81,000 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 $135,000 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. Complete this question by entering your answers in the tabs below. Required Required 1 | 2 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. Show less Double-declining balance Year 1 (2018) Year 2 (2019) Year 3 (2020) Year 4 (2021) Required 1 Required 2 >

Answer 1

Step 1: -

Rate of Depreciation being Used on Current Year's closing balance

=Current year depreciation /current years Closing Balance x 100

= 13500 /81000 x 100

= 16.67% on current year's closing balance

.

Step 2:-

Reconstructing the depreciation schedule through reverse calculations

Year Ending	Closing Balance	Depreciation Expense	Opening Balance
	(a)	(b) = 16.67% of (a)	(c ) = (a) +(b)
2021	81000	13500	94500
2020	94500	15750	110250
2019	110250	18375	128625
2018	128625	6375*	135000

*Depreciation in 2018 cannot exceed $6375 as cost of Plant and equipment is $135000/-.

Note:- Last years Closing Balance is equal to current years opening balance.

Final Answer

Depreciation As per Double Declining Balance Method

Year Ending	Depreciation Expense	Closing balance
2018	$6375	128625
2019	18375	110250
2020	15750	94500
2021	13500	81000
Subtotal	54000