Question

Jackson Corp. is a telecommunication company. The company spent $300,000 in 2017, $400,000 in 2018, and $350,000 in 2019 leasing and maintaining equipment for its cable and Internet service division. The company capitalized the spending and would amortize it over a period of 5 years. Intangible assets are usually amortized using straight-line method. In December 2019, before closing books for 2019, Jackson Corp. reviewed its accounting practice with its auditor. During the review process, the auditor pointed out that all such equipment maintenance costs should be expensed as incurred. The tax treatment is the same as in financial reporting – the company needs to expense all the leasing and maintenance cost but mistakenly capitalized and amortized them.

Required: Assume a tax rate of 30%, please prepare the adjusting entries the company made for correcting the error in 2019.

(Hint: the adjusting entries are usually done as of the beginning of the current reporting period).

Answer 1

	Adjusting entries
For 2017	maintainence dr	210000
	tax saving (300000*30%)	90000
	To equipment		300000
For 2018
	maintainence dr	280000
	tax saving (400000*30%)	120000
	To equipment		400000
for amortisation	equipment( 300000/5)	60000
of 2017	To amortisation		42000
	To tax saving		18000
For 2019	maintainence dr	245000
	tax saving (350000*30%)	105000
	To equipment		350000
for amortisation	equipment( 300000/5)	60000
of 2017	To amortisation		42000
	To tax saving		18000
for amortisation	equipment( 400000/5)	80000
of 2018	To amortisation		42000
	To tax saving		24000