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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 12/31/2021 year-end financial statements for Company B:

Income Statement
Depreciation expense $ 5,000
Balance Sheet
Assets:
Plant and equipment, at cost $ 100,000
Less: Accumulated depreciation (20,000 )
Net $ 80,000


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 $100,000 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.

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

  • Record the depreciation expense for 2021.

Note: Enter debits before credits.
Transaction General Journal Debit Credit
1

Solutions

Expert Solution

Solution:

1) Required 1

Depreciation expenses for 2021 by using double declining balance method

Plant and equipment , at cost = $100000

Depreciation rate = 5%

Total depreciation expense , using straight line method for last 3 year = $15000

This year straight line depreciation expense = $100000*5% = $5000

That means the plant depreciation at the each year is = $5000

So the useful life of the asset = 100000/5000 = 20 years

So the depreciation expense of plant and equipment using double declining method is =

Double declining rate = 2* straight line method

= 2 * 5% = 10%

Depreciation amount = Double declining rate * book value of assets in the current year

At the year 2018 = 10% * 100000 = $10000

At the year 2019 = 10% * 90000 (100000 - 10000) = $9000

At the year 2020 = 10% * 81000 ( 90000 - 9000) = $8100

At the year 2021 = 10% * 72900 ( 81000 - 8100) = $7290

Depreciation expense for 2021 = $7290

2) Required 2.

Journal entry for depreciation expense for 2021

General journal Debit Credit

Depreciation expense $7290

Accumulated Depreciation $7290

ekkarill92 answered 1 year ago
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