- The Fact That Generally Accepted Accounting Principles Allow Companies Flexibility In Choosing Between Certain Allocatio 1 (55.69 KiB) Viewed 66 times
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 12/31/2021 year-end financial statements for
Company B: Income
Statement Depreciation expense $14,000 Balance Sheet Assets: Plant and equipment, at cost Less: Accumulated depreciation Net $280,000 (56,000) $224,000 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 $280,000 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 2021 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 2021 from the straight line to the double-declining-balance method, prepare the 2021 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2021 has yet been recorded.