Question

Problem 20-17 Integrating problem; error; depreciation; deferred taxes [LO20-6]

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 $2.2 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	$	314,380
2016		538,780
2017		384,780
2018		274,780
2019		196,460
2020		196,240
2021		196,460
2022		98,120
Totals	$	2,200,000

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

Solution:

From the given data first we need to find the straight line depreciation.

Straight line depreciation = $2,200,000 / 10

= $220,000

Particulars	2015	2016	2017
MACRS deductions	$314,380	$538,780	$384,780
Straight line depreciation	($220,000)	($220,000)	($220,000)
Difference	$94,380	$318,780	$164,780
Cumulative difference	$94,380	$413,160	$577,940
Tax rate	40%	40%	40%
Deferred tax liability	$56,628	$165,264	$231,176

Accumulated depreciation = (220,000*3)

= $660,000

Income tax payable = [2,200,000 - (314,380+538,780+384,780)]*40%

= (2,200,000 - 1,237,940) * 40%

= 962,060 * 40%

= $384,824

Retained earnings = (2,200,000 - 660,000) - (2,200,000 - 660,000) * 40%

= $924,000

.

Journal entries

Date	Particulars	Debit($)	Credit($)
Dec 31, 2018	Machinery A/c Dr	$2,200,000
	To Accumulated Depreciation A/c		$660,000
	To Deferred tax liability A/c		$231,176
	To Retained earnings A/c		$924,000
	To Income tax payable A/c		$384,824
Dec 31, 2018	Depreciation expense A/c Dr	$220,000
	To Accumulated Depreciation A/c		$220,000