Question

George Young Industries (GYI) acquired industrial robots at the beginning of 2018 and added them to the company’s assembly process. During 2021, management became aware that the $1.3 million cost of the equipment was inadvertently recorded as repair expense on GYI’s books and on its income tax return. The industrial robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for financial reporting purposes and for tax purposes it is considered to be MACRS 7-year property. Cost deducted over 7 years by the modified accelerated recovery system as follows:

Year	MACRS Deductions
2018	$	185,770
2019		318,370
2020		227,370
2021		162,370
2022		116,090
2023		115,960
2024		116,090
2025		57,980
Totals	$	1,300,000

The tax rate is 25% for all years involved.

Required:
1. & 3. Prepare any journal entry necessary as a direct result of the error described and the adjusting entry for 2021 depreciation.
2. Will GYI account for the change (a) retrospectively or (b) prospectively?

Answer 1

2 AB Ans: 1)&3) Year Mars Deduction Straight Line Depreciation Difference Cummulative temporary Differnce Deferred Tax Liability 2018 185.770 130.000 55.770 55,770 13.943 2019 318,370 130.000 188.370 244.140 61,035 2020 227.370 130,000 97.370 341,5101 85.378 731,510 390.000 341,510 Straight Line Depreciation per annum = $1,300,000 / 10 Years Straight Line Depreciation per annum = $130,000 per annum Date Accounts title and explanation Debit Credit Machinery $1,300,000 Accumulated Depreciation $390,000 $220.000 X 3 Years Deferred Tax Liability $85,378 S341.510 X 25% Income Tax Payable $142,123(S1,300,000 - ($185,770+$318,370+$227,370)) X 25% Retained Earnings $682,500 ($1,300,000-$390,000) - 25% of ($1,300,000-$390,000) S130.000 Depreciation Expenses Accumulated Depreciation $130.000 17 18 19 2) Will GYI account for the change (a) retrospectively or (b) prospectively? Ans: (b) prospectively 20

=E3 Difference =C3-D3 =C4-D4 =C5-D5 =SUME3:E5) Cummulative temporary Differnce Deferred Tax Liability =F3*25% =E3+E4 =F4*25% =F4+E5 =F5*25% 4 AB Ans: 2 1)&3) Year Mars Deduction Straight Line Depreciation 2018 185770 130000 2019 318370 130000 2020 227370 130000 =SUM(C3 C5) =SUMD3 D5) Straight Line Depreciation per annum = $1,300.000 / 10 Years Straight Line Depreciation per annum = $130.000 per annum Date Accounts title and explanation Debit Machinery 1300000 Accumulated Depreciation Deferred Tax Liability Income Tax Payable Retained Earnings Credit D6 $220.000 X 3 Years =F5*25% $341,510 X 25% =(D10-C6)*25% ($1.300.000 - ($185.770+$318,370+$227,370)) X 25% =(D10-D6)-(D10-D6)*25%) ($1,300,000-$390,000) - 25% of ($1,300,000-$390,000) Depreciation Expenses Accumulated Depreciation =D16 17 18 19 2) Will GYI account for the change (a) retrospectively or (b) prospectively? Ans: (b) prospectively 20