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 12/31/11 year-end financial statements for Company B:

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 depreciable assets. Also, all of the depreciable assets have the same useful life and residual values are zero.

1. In order to compare performance with Company A, estimate what B's depreciation expense would have been for 2011 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 2011 from the straight line to the double-declining-balance method, prepare the 2011 adjusting journal entry to record depreciation for theyear.

  • CreatedJuly 02, 2013
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