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 $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

Answer 1

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.