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 12/31/18 year-end financial statements for Company B: Income Statement Depreciation expense $5,500 Balance Sheet Assets: Plant and equipment, at cost Less: Accumulated depreciation $ 55,000 (22,000) $ 33,000 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 $55,000 represents depreciable assets. Also, all of the depreciable assets have the same useful life and residual values are zero.

Answer 1

Solution:

Required 1:

Double-declining balance	Depreciation
Year 1 (2015)	$             11,000
Year 2 (2016)	$               8,800
Year 3 (2017)	$               7,040
Year 4 (2018)	$               5,632

Note:

1) Calculation of depreciation under Double-Declining Balance Method:

Year	Opening Balance	Depreciation	Accumulated Depreciation	Ending Balance
				$        55,000
Year 1 (2015)	$             55,000	$          11,000	$                   11,000	$        44,000
Year 2 (2016)	$             44,000	$            8,800	$                   19,800	$        35,200
Year 3 (2017)	$             35,200	$            7,040	$                   26,840	$        28,160
Year 4 (2018)	$             28,160	$            5,632	$                   32,472	$        22,528

2) Depreciation Rate under Straight Line Method = 1 / Useful life of asset = 1 /10= 10%

Depreciation Rate under Double-Declining Balance Method = Depreciation Rate under Straight Line Method*2

= 10%*2 = 20%

Required 2:

No	Event	General Journal	Debit	Credit
1	1	Depreciation Expense	$ 10,472
		Accumulated depreciation		$ 10,472
		[ Being depreciation expense]

Depreciation expense for 2018 = Closing balance under Straight Line Method in 2018 - Closing balance under Double Declining Balance Method in 2018

= $ 33,000 ( Given)  - $ 22,528 (Note:1 Above) = $10,472