The fact that generally accepted accounting principles allow companies flexibili
ID: 2425469 • Letter: T
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 12/31/16 year-end financial statements for Company B:
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 $140,000 represents depreciable assets. Also, all of the depreciable assets have the same useful life and residual values are zero.
In order to compare performance with Company A, estimate what B's depreciation expense would have been for 2016 if the double-declining-balance depreciation method had been used by Company B since acquisition of the depreciable assets.
If Company B decided to switch depreciation methods in 2016 from the straight line to the double-declining-balance method, prepare the 2016 adjusting journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2016 has been recorded. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
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 12/31/16 year-end financial statements for Company B:
Explanation / Answer
1. Asset life = Total value/depreciation per year = $140,000/$7,000 = 20 years.
Depreciation rate as per straight line method = 100%/20 years = 5% per year
Depreciation rate as per double declining balance method = 2*straight line method = 2*5% = 10% per year
Thus depreciation for 2016 = $10,206
2. Total depreciation under the old method = $28,000. Total depreciation under the new method = 14000+12600+11340+10206 = $48,146
Difference = 48,146 - 28,000 = $20,146. Thus lower depreciation was charged under the old method.
Depreciation for the current year = closing balance for 2015 (as computed in the table above)*10% = 91854*10% = $9,185.40.
The adjusting entry would thus be:
a b = 0.1*a a-b Year Opening balance Depreciation @ 10% Closing balance 1 140,000.00 14,000.00 126,000.00 2 126,000.00 12,600.00 113,400.00 3 113,400.00 11,340.00 102,060.00 4 102,060.00 10,206.00 91,854.00Related Questions
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