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 12/31/2021 year-end financial statements for Company B:

Income Statement
Depreciation expense	$	5,000

Balance Sheet
Assets:
Plant and equipment, at cost	$	100,000
Less: Accumulated depreciation		(20,000	)
Net	$	80,000

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 $100,000 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.

• Required 1
• Required 2

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.

Double-declining balance
Year 1 (2018)
Year 2 (2019)
Year 3 (2020)
Year 4 (2021)

• Required 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

• Record the depreciation expense for 2021.

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

Answer 1