The fact that generally accepted accounting principles allow companies flexibility in choosing between certain allocation methods...

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	$	14,500

Balance Sheet
Assets:
Plant and equipment, at cost	$	145,000
Less: Accumulated depreciation		(58,000	)
Net	$	87,000

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 $145,000 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.

Expert Solution


Requirement 1
Life of the machine =($14,500/$145,000) =10 Years
Depreciation already charged for Years:$58,000 / $14,500 =4 Years
Remaining useful life =6 Years
Depreciation rate under Double Declining balance method =20%
Double Declining balance
Date	Cost of asset	Book Value	DDB Rate	Depreciation expenses	Accumulated Depreciation	Book value
At Acquistion	$1,45,000					$1,45,000
2018		$1,45,000	20.00%	$29,000	$29,000	$1,16,000
2019		$1,16,000	20.00%	$23,200	$52,200	$92,800
2020		$92,800	20.00%	$18,560	$70,760	$74,240
2021		$74,240	20.00%	$14,848	$85,608	$59,392
So for 2021 Depreciation expense under Double Declining balance method is $14,848.

Requirement 2
As per the information given Depreciation has been charged for 3 years under Straigh-Line method
So Book Value as on Dec 31,2020 =$145,000 - ($14,500*3) =$101,500
Remaining useful life =7 Years
Depreciation rate under Double Declining balance method =(1 / 7 Years)*2 =28.571428571%
Depreciation for 2021 under Double Declining balance method =$101,500*28.571428571% =$29,000
Date	Account explanation	Debit	Credit
Dec 31,2021	Depreciation expense	$29,000
	Accumulated Depreciation-Equipment		$29,000
	(to depreciation charged underDouble Declining balance method)

ekkarill92 answered 2 years ago

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The fact that generally accepted accounting principles allow companies flexibility in choosing between certain allocation methods...

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