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: Accumulated depreciation .................. (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 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 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 journal entry to record depreciation for the year, assuming no journal entry for depreciation in 2018 has yet been recorded.