The fact that generally accepted accounting principles allow companies flexibility in choosing between certain allocation...
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Accounting
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 doubledecliningbalance depreciation method. Company B uses the straightline method. You have the following information taken from the yearend financial statements for Company B:
Income Statement
Depreciation expense $
Balance Sheet
Assets:
Plant and equipment, at cost $
Less: Accumulated depreciation
Net $
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 $ represents depreciable assets. Also, all of the depreciable assets have the same useful life and residual values are zero.
Required:
In order to compare performance with Company A estimate what Bs depreciation expense would have been for if the doubledecliningbalance depreciation method had been used by Company B since acquisition of the depreciable assets.
If Company B decided to switch depreciation methods in from the straight line to the doubledecliningbalance method, prepare the journal entry to record depreciation for the year, assuming no journal entry for depreciation in has yet been recorded.
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