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 12/31/18 year-end financial statements for Company B:

Income Statement
Depreciation expense	$	13,000

Balance Sheet
Assets:
Plant and equipment, at cost	$	260,000
Less: Accumulated depreciation		(52,000	)
Net	$	208,000

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 $260,000 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 2015 through 2018 if the double-declining-balance depreciation method had been used by Company B since acquisition of the depreciable assets.

Double Declining Balance
Year 1
Year 2
Year 3
Year 4

2. If Company B decided to switch depreciation methods in 2018 from the straight line to the double-declining-balance method, prepare the 2018 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2018 has yet been recorded.

Solutions

Expert Solution

company B follows straight line method ,each year its depreciation expense would be $13,000

therefore if accumulated depreciation will take 4 years to $52,000

so the machine is purchased 4 years ago i.e star of year 2015

days of acquisition=accumulated depreciation/ depreciation expense for the year

=$52,000/$13,000=4 Years ago=i.e 2015

Useful life=$260,000/$13,000=20 Years

now calculate depreciation rate as per DDB=1/20=5%*2=10%

		DDB RATE	Accumulated depreciation	Net value of Asset
2015	2,60,000	10%	26,000	2,33,000
2016	2,34,000	10%	23,400	2,11,600
2017	2,10,600	10%	21,060	1,89,540
2018	1,89,540	10%	18,954	1,71586

2)now your net book value of asset as on beginning of 2018 is:

Assets Value	2,60,000
Less:Depreciation(2015 to 2017) (i.e 3 years*13000)	39,000
net book value beginning 2018	2,21,000

again we calculate life of asset=20 years - 3vyears=17 years
DDB rare=1/17=.0589*2=11.76% (rounded off)
*deprecation for the year=$221,00011.76%=$26,000(rounded off)**

JOURNAL ENTRY FOR 2018
Accounts titles and Explanation	Debit ($)	Credit ($)
Depreciation expense	27,000
Accumulated depreciation		27,000

ekkarill92 answered 1 year ago

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