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 12/31/2024 year-end financial statements for Company B: Income Statement Depreciation expense $ 11,500 Balance Sheet Assets: Plant and equipment, at cost $ 115,000 Less: Accumulated depreciation (46,000) $ 69,000 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 $115,000 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 2024 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 2024 from the straight line to the double-declining-balance method, prepare the 2024 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2024 has yet been recorded.
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 12/31/2024 year-end financial statements for Company B: Income Statement Depreciation expense $ 11,500 Balance Sheet Assets: Plant and equipment, at cost $ 115,000 Less: Accumulated depreciation (46,000) $ 69,000 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 $115,000 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 2024 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 2024 from the straight line to the double-declining-balance method, prepare the 2024 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2024 has yet been recorded.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 12/31/2024 year-end financial statements for Company B:
Income Statement
Depreciation expense $ 11,500
Balance Sheet
Assets:
Plant and equipment, at cost
Less: Accumulated depreciation (46,000)
$ 69,000
Net
$ 115,000
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 $115,000 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 2024 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 2024 from the straight line to the double-declining-balance method, prepare the 2024 journal entry to record depreciation for the year, assuming no journal
entry for depreciation in 2024 has yet been recorded.
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