The fact that generally accepted accounting principles allow companies flexibili
ID: 2468460 • 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 $95,000 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.)
References
eBook & Resources
General JournalLearning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods.
Difficulty: 3 HardLearning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
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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
ANSWER 1
Usefull life of the asset => 95000/9500 => 10 years
already deprecaited for => 38000 /9500 => 4 years
Asset have been depreciated for 4 years it means it were purchased in the beggining of 2013.
100%/10 => 10% annual straght line deprecaiation method
10% *2 => 20% double declining balance method
ANSWER 2
Differnce in accumulated depreciation as more in double declining method=> 56088 - 38000 => $18088
Journal Entry
Cummulative effect of chnage in accounting principle a/c dr. $18088
To Accumulated Depreciation A/c Cr. $18088
Note:- The cumulative effect is included in the income statement and reduces net income, thereby reducing the Retained Earnings account. The credit to the Accumulated Depreciation account increases its balance.
YEAR BOOK BALUE AT YEAR START DEPRECIATION ACCUMULATE DEP. BOOK VALUE AT YEAR END 2013 95000 19000 19000 76000 2014 76000 15200 34200 60800 2015 60800 12160 46360 48640 2016 48640 9728 56088 38912Related Questions
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