Ally Biles works for Coast Resort Co. She and Paul Smith, her manager, are preparing adjusting entries for annual financial statements. Biles computes depreciation and records it as:
Depreciation Expense – Equipment 123,000
Accumulated Depreciation – Equipment 123,000
Smith agrees with her computation but says that the credit entry should be directly to the Equipment account. Smith argues that while accumulated depreciation is technically correct, “it is less hassle not to use a contra account and just credit the Equipment account directly. And besides, the balance sheet shows the same amount for total assets under either method.”
- How should depreciation be recorded? Do you support Biles or Smith?
- Evaluate the strengths and weaknesses of Smith’s reasons for preferring his method.