Concept explainers
Depreciation methods; change in methods
• LO11–2, LO11–6
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 12/31/2018 year-end financial statements for Company B:
Income Statement | |
Depreciation expense | $ 10,000 |
Balance Sheet | |
Assets: | |
Plant and equipment, at cost | $200,000 |
Less: |
(40,000) |
Net | $160,000 |
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 $200,000 represents
Required:
1. In order to compare performance with Company A, estimate what B’s depreciation expense would have been for 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
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