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	$	10,000

Balance Sheet
Assets:
Plant and equipment, at cost	$	200,000
Less: Accumulated depreciation		(40,000	)
Net	$	160,000

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 $200,000 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.

Answer 1

1)first lets calculate when company B purchased the machine

we can see feom the question that accumulated depriciation is $40,000

and depriciation expense for the year is $10,000

company B follows straight line method meaning each year its depriciation expense would be $10,000

therefore if count it will take 4 years to reach depriciation of $40,000

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

or calculate through formula:DAYS OF ACQUISITION=ACCUMULATED DEPRICIATION/ DEPRICIATION EXPENSE FOR THE YEAR

=$40,000/$10,000=4 YEARS AGO=START OF 2015

ALSO CALCULATE USEFUL LIFE=$200,000/$10,000=20 YEARS

NOW CALCULATE DEPRICIATION RATE AS PER DDB=1/20=5%*2=10%

		DDB RATE	DEPRICIATION EXPENSE	NET VALUE OF ASSET
2015	200,000	10%	20,000	180,000
2016	180,000	10%	18,000	162,000
2017	162,000	10%	16,200	145,800
2018	145,800	10%	14,580	131,220

2)NOW YOUR NET BOOK VALUE OF ASSET AS ON BEGINNING OF 2018 IS:

ASSET VALUE ........................... $200,000

LESS:DEPRICIATION 2015.........................$10,000

LESS:DEPRICIATION 2016........................$10,000

LESS:DEPRICIATION 2017.....................$10,000

NET BOOK VALUE BEGINNING 2018........$170,000

AGAIN WE CALCULATE LIFE OF ASSET=20 YEARS - 3YEARS=17 YEARS

DDB RARE=1/17=.0589*2=11.76% (ROUNDED OFF)

DEPRICATION FOR THE YEAR=$170,000*11.76%=$20,000(ROUNDED OFF)

JOURNAL ENTRY FOR 2018

		DEBIT	CREDIT
DEPRICIATION EXPENSE		$20,000
ACCUMULATED DEPRICIATION			$20,000