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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 $ 6,500 Balance Sheet Assets: Plant and equipment, at cost $ 65,000 Less: Accumulated depreciation (26,000 ) Net $ 39,000 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 $65,000 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.

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

Basic Information:

Plant and Equipment 65000
Less: Accummulated Depreciation 26000
Net 39000
Per year Depreciation 6500
Year of Use 4
Current Year 2018
Year of Purchase 2014
Useful Life 10
Rate of Depreciation 10%

Answer to Part 1:

2014-12-31 2015-12-31 2016-12-31 2017-12-31 2018-12-31 2019-12-31 2020-12-31 2021-12-31 2022-12-31 2023-12-31 2024-12-31
Straight Line Method     6,500.00     6,500.00     6,500.00     6,500.00     6,500.00     6,500.00       6,500.00         6,500.00     6,500.00     6,500.00
Asset Value 65,000.00 58,500.00 52,000.00 45,500.00 39,000.00 32,500.00 26,000.00    19,500.00       13,000.00     6,500.00                 -  
Diminishing Balance Method     6,500.00     5,850.00     5,265.00     4,738.50     4,264.65     3,838.19       3,454.37         3,108.93     2,798.04     2,518.23
Asset Value 65,000.00 58,500.00 52,650.00 47,385.00 42,646.50 38,381.85 34,543.67    31,089.30       27,980.37 25,182.33 22,664.10

Answer to Part 2:

Journal Entry in 2018 if the method of depreciation changed.

At the end of 2017, looking into the above schedule, the asset value would have been 45500.

And considering the rate of depreciation as 10%.

Entry:

Accumulated Depreciation ...Dr 4550

To Plant and Equipment 4550

ekkarill92 answered 1 year ago
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