The fact that generally accepted accounting principles allowcompanies flexibility in choosing between certain allocationmethods can make it difficult for a financial analyst to compareperiodic performance from firm to firm.
Suppose you were a financialanalyst trying to compare the performance of two companies. CompanyA uses the double-declining-balance depreciation method. Company Buses the straight-line method. You have the following informationtaken from the 12/31/16 year-end financial statements for CompanyB:
Income Statement Depreciationexpense $ 7,000
Balance Sheet Assets: Plant and equipment, at cost $ 140,000 Less: Accumulated depreciation (28,000 ) Net $ 112,000
You also determine that all of theassets constituting the plant and equipment of Company B wereacquired at the same time, and that all of the $140,000 representsdepreciable assets. Also, all of the depreciable assets have thesame useful life and residual values are zero.
Required:
1. In order to compare performance with Company A, estimate whatB's depreciation expense would have been for 2016 if thedouble-declining-balance depreciation method had been used byCompany B since acquisition of the depreciable assets.
2. If Company B decided to switch depreciation methods in 2016 fromthe straight line to the double-declining-balance method, preparethe 2016 adjusting journal entry to record depreciation for theyear, assuming no journal entry for depreciation in 2016 has beenrecorded. (If no entry is required for a transaction/event,select "No journal entry required" in the first accountfield.)
The fact that generally accepted accounting principles allowcompanies flexibility in choosing between certain allocationmethods can make it difficult for a financial analyst to compareperiodic performance from firm to firm. |
Suppose you were a financialanalyst trying to compare the performance of two companies. CompanyA uses the double-declining-balance depreciation method. Company Buses the straight-line method. You have the following informationtaken from the 12/31/16 year-end financial statements for CompanyB: |
| Income Statement | |||
| Depreciationexpense | $ | 7,000 | |
| Balance Sheet | |||
| Assets: | |||
| Plant and equipment, at cost | $ | 140,000 | |
| Less: Accumulated depreciation | (28,000 | ) | |
| Net | $ | 112,000 | |
You also determine that all of theassets constituting the plant and equipment of Company B wereacquired at the same time, and that all of the $140,000 representsdepreciable assets. Also, all of the depreciable assets have thesame useful life and residual values are zero. |
| Required: |
| 1. | In order to compare performance with Company A, estimate whatB's depreciation expense would have been for 2016 if thedouble-declining-balance depreciation method had been used byCompany B since acquisition of the depreciable assets. |
| 2. | If Company B decided to switch depreciation methods in 2016 fromthe straight line to the double-declining-balance method, preparethe 2016 adjusting journal entry to record depreciation for theyear, assuming no journal entry for depreciation in 2016 has beenrecorded. (If no entry is required for a transaction/event,select "No journal entry required" in the first accountfield.) |
