The fact that generally accepted accounting principles allow companies flexibili

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:

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.

Income Statement Depreciation expense $ 10,000

Explanation / Answer

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%

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

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

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.