Case 1-6
Capitalization versus Expensing
Gloria Hernandez is the controller of a public company. She just completed a meeting with her superior,
John Harrison, who is the chief financial officer of the company. Harrison tried to convince Hernandez to
go along with his proposal to combine twelve expenditures for repair and maintenance of a plant asset into
one amount ($1 million). Each of the expenditures is less than $100,000, the cut-off point for capitalizing
expenditures as an asset and depreciating it over the useful life. Hernandez asked for time to think about the
matter. As the controller and chief accounting officer of the company, Hernandez knows it’s her
responsibility to decide how to record the expenditures. She knows that the $1 million amount is material to
earnings and the rules in accounting require expensing, not capitalization. However, she is under a great
deal of pressure to go along with capitalization to meet financial analysts’ earnings expectations and
provide for a bonus to top management including her. Her job may be at stake and she doesn’t want to
disappoint her boss.
Questions
1. What would motivate you to speak up and act or to stay silent?
Gloria needs the courage to speak up about how it is wrong to capitalize $1 million that should be
expensed. She needs to think of long term results of what doing this would do to the company’s and her
2. Assume you were in Gloria Hernandez’s position. What would you do and why?
Gloria is being asked to capitalize $1,000,000, 000 rather than expense the 12 items totaling $1 million.
The difference in accounting treatment has an immediate effect of increasing net income for the year, which
will lead to bigger bonuses for the executives. It might seem tempting to go along with the plan since her
job may be at stake and she does not want to disappoint her boss. However, under deontology, virtues and
rights theories and in compliance with the AICPA and IMA codes, Gloria should expense the items. Gloria