The fact that generally accepted accounting principles allow companies flexibili
ID: 2466599 • 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 $240,000 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.
Double-declining balance
year 1 (2013) :
year 2 (2014) :
year 3 (2015) :
year 4 (2016) :
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.)
Record the depreciation expense for 2016:
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
lIfe of an Asset => 240000 / 12000 => 20 Years
Answer a
Double declining Balance method
Straight line rate => (12000 /240000 )*100 => 5%
Answer b
2016 => 240000 - 24000 -21600 - 19440 => 174960 / 17 => $10291.8
Depreciation Expense for 2016 => $10291.8
journal entry
Depreciation expense A/c Dr. $10291.8
To Accumulated Depreciation A/c Cr. $10291.8
note => As no entry forn 2016 is passed yet, so normal depreciation entry will be passed to record i.
YEAR Begginiong Value Double-declining balance depreciation computed as 2 × SL rate × beginning NBV ie 10% Net Book Value end of year 2013 240000 24000 216000 2014 216000 21600 194400 2015 194400 19440 174960 2016 174960 17496 157464Related Questions
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