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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 12/31/18 year-end financial statements for Company B:
Income Statement Depreciation expense$10,500
Balance Sheet Assets: Plant and equipment, at cost$105,000 Less: Accumulated depreciation (42,000) Net$63,000
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 $105,000 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 2015 through 2018 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 2018 from the straight line to the double-declining-balance method, prepare the 2018 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2018 has yet been recorded.
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