You have just landed an accounting position with a national telecommunications company. Because this is your first job you are eager to please your co-workers and your supervisor, who works closely with the controller. Your supervisor has just paid you a visit, and she told you that the controller is concerned that profits for the last fiscal year are much less than profits for the preceding five years. The controller has asked that depreciation on a machine purchased at the beginning of last year be recalculated. The machine has a five-year useful life and is depreciated using the straight-line method. The controller has asked that the machine be depreciated over a ten-year useful life. Your supervisor contends that the “depreciation thing” really doesn’t matter because the machine has already been paid for. In addition, your supervisor gives you an adjusting journal entry to correct what she calls “expense transfers.” This entry transfers items originally recorded as repairs and maintenance to capital assets.
Address the following:
- Do you agree with the supervisor regarding the change in the estimated useful life of the machine? Why or why not?
- Are you going to recalculate the depreciation and change the entry? Why or why not?
- What is the proper accounting treatment for: (a) repairs and maintenance and
(b) plant assets?
- What is your supervisor trying to accomplish with the suggested “expense transfers” entry? What would be your course of action regarding the suggested entry?