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 12/31/18 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.

Answer 1

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=$221,000*11.76%=$26,000(rounded off)

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