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
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 | $ | 12,500 | |
Balance Sheet | ||||
Assets: | ||||
Plant and equipment, at cost | $ | 125,000 | ||
Less: Accumulated depreciation | (50,000 | ) | ||
Net | $ | 75,000 | ||
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 $125,000 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.
Double-declining balance Year 1 (2018) Year 2 (2019) Year 3 (2020) Year 4 (2021)Step by Step Solution
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