The fact that generally accepted accounting principles allow companies flexibili
ID: 2457284 • 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
In the long run (i.e. till the age of asset) both method will give same amount of closing accumlated depreciation. However, in case of double declining method initially amount of depreciation would be higher than the amount of straight line method.
Under the double declining method, double means twice of the straight line method.
1. 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 would have been $ 19,000 (9500 x 2) instead of 9,500.
2. If company wants to change its accounting policies, nothing from the past needs to be changed. (i.e. no retrospective change)
The change must reflect in current and future financial statemeents.
Hence to record the change journal entry would be
Depreciation Expense Dr. 19,000
To Plant and equipment / Accumulated depreciation 19,000.
Balance sheet will look like (assuming current effect is not given in the above BS)
Balance Sheet Assets: Plant and equipment, at cost $ 95,000 Less: Accumulated depreciation (57,000 ) Net $ 38,000Related Questions
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