Question

Jackie Houston is a new accountant for Seitzer Company. She is learning on the job from Bob Welch, who has already worked several years for Seitzer. Jackie and Bob are preparing the year-end adjusting entries. Jackie has calculated that depreciation expense for the fiscal year should be recorded as: Depreciation Expense, Equipment.................. 123,546 Accumulated Dep., Equipment...................... 123,546 Bob is rechecking the numbers and says that he agrees with her computation. However, he says that the credit entry should be made directly to the Equipment account. He argues that while accumulated depreciation is taught in the classroom, “It is easier to ignore the contra account and just credit the Equipment account directly for the annual depreciation. Besides, the balance sheet shows the same amount for total assets under both methods.” Question 1: How should depreciation be recorded? Do you support Jackie or Bob? Question 2: Evaluate the strengths and weaknesses of Bob’s reasons for preferring his method. Question 3: Indicate whether the situation faced by Jackie is an ethical problem.

Answer 1

1) The depreciation must be recorded with a credit to accumulated depreciation because it helps to analyze the total depreciated amount for equipment and the book value of the equipment. Thus would support Jackie for recording the depreciation.

2) The major strengths of Bob's reasons for preferring his method is that the need of contra entry will be eliminated. However major weaknesses of Bob's method will be difficult to determine the total amount of depreciable for the equipment and evaluating the equipment's the book value.

3) In my opinion Jackie will not face ethical issue. The reason is that according to GAAP Jackie is adopting an appropriate measure to compute the accumulated depreciation and asset