Question
In: Accounting
George Young Industries (GYI) acquired industrial robots at the beginning of 2018 and added them to...
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 $2.8 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 | $ | 400,120 | |
| 2019 | 685,720 | ||
| 2020 | 489,720 | ||
| 2021 | 349,720 | ||
| 2022 | 250,040 | ||
| 2023 | 249,760 | ||
| 2024 | 250,040 | ||
| 2025 | 124,880 | ||
| Totals | $ | 2,800,000 | |
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?
- Record the correcting entry.
- Record the 2021 adjusting entry for depreciation
Solutions
Expert Solution
| In the Beginning of 2018 | |||||||||
| Cost of Asset | 2800000 | ||||||||
| Salvage Value | NIL | ||||||||
| Useful life of Asset | 10 Years | ||||||||
| Applied | SLM Method of Depreciation | ||||||||
| Decemebr 2018 | |||||||||
| Decembr 2019 | |||||||||
| Decemebr 2020 | |||||||||
| Dcembr 2021 | Found change in Depreciation from SLM to MACRS 7 Years | ||||||||
| Henc Carrying value till December 2020 | |||||||||
| Depreciation under SLM= 2800000-0/10 = 280000 | |||||||||
| Carrying Value | |||||||||
| Decemebr 2018 | 280000 | 2520000 | |||||||
| Decembr 2019 | 280000 | 2240000 | |||||||
| Decemebr 2020 | 280000 | 1960000 | |||||||
| Opening value for Year Ended 2021 | 1960000 | ||||||||
| Depreciation will be as per MARCs 7 method Instead of 280000 | |||||||||
| Shall be applied prospectively not retrospecyively | |||||||||
| Because IFRS 8 Speciafically disclosed that change in method of Depreciation is not change in Accounting policy | |||||||||
| But change in Accounting Estimate henc effect for the same should be applied prospectively not retrospectively | |||||||||
| Hence Depreciation will be charged as 14.29 % ( MARCs recovery rate) | |||||||||
| Depreciation A/c Dr. | 280084 | ||||||||
| To Asset | 280084 | ||||||||
| ( Being Depreciation Charged on MARCs 7 Basis ) | |||||||||
| Secondly Disclosure for Change in method will be disclose in the books of Accounts. |
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