Question

George Young Industries (GYI) acquired industrial robots at the beginning of 2015 and added them to the company’s assembly process. During 2018, management became aware that the $2.0 million cost of the machinery 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
2015	$	285,800
2016		489,800
2017		349,800
2018		249,800
2019		178,600
2020		178,400
2021		178,600
2022		89,200
Totals	$	2,000,000

The tax rate is 40% 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 2018 depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Year	Macrs Deprn.	SL Deprn.	Difference	Cumulative Temporary Diff.	Deferred tax liability.
2015	$        285,800	$        200,000	85,800	85,800	$                            34,320
2016	$        489,800	200,000	289,800	375,600	150,240
2017	$        349,800	200,000	149,800	525,400	210,160
Entry for correction:
Accounts Title and Explanation					Dr($)	Cr($)
Machinery (cost)					$                      2,000,000
Accumulated depreciation (SL depr: $200,000 x 3 years)						$        600,000
Deferred tax liability (40% x cumulative temporary difference)						$        210,160
Income tax payable (40% x [$2,000,000 – (285,800 + 489,800 + 349,800)])						$        349,840
Retained earnings ([$2,000,000 – 600,000] less 40% x [$2,000,000 – 600,000])						$        840,000
Entry for adjustments:
Depreciation Expense					$                          200,000
Accumulated Depreciation						$        200,000
(Being depreciation for 2018 recorded)