George Young Industries (GYI) acquired industrial robots at the beginning of 201

Question

George Young Industries (GYI) acquired industrial robots at the beginning of 2013 and added them to the company’s assembly process. During 2016, management became aware that the $1.2 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 2013 $ 171,480 2014 293,880 2015 209,880 2016 149,880 2017 107,160 2018 107,040 2019 107,160 2020 53,520 Totals $ 1,200,000 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 2016 depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) A) Record the Correcting entry B) Record the 2016 adjusting entry for depreciation.

Explanation / Answer

A deferred tax liability is a result of temporary differences between the company's accounting and tax carrying values

Accounting purpose tax purpose 1200000 1200000 10yrs straight line DEPRECIATION YEARS 7years MACRS DEPRECIATION YEARS 10.00% 120000   2013 14.29% 171480   2013 10.00% 120000   2014 24.49% 293880   2014 10.00% 120000   2015 17.49% 209880   2015 10.00% 120000   2016 12.49% 149880   2016 10.00% 120000   2017 8.93% 107160   2017 10.00% 120000   2018 8.92% 107040   2018 10.00% 120000   2019 8.93% 107160   2019 10.00% 120000   2020 4.46% 53520   2020 10.00% 120000   2021 1200000 10.00% 120000   2022 1200000

A deferred tax liability is a result of temporary differences between the company's accounting and tax carrying values

working Detail Accounting purpose Tax purpose Cost of Machinery 1200000 1200000 Depreciation in 3yrs 360000 675240 Temporary difference 315240 Reamining Cost 840000 524760 Tax rate 40% 40% Income Tax 336000 209904 Defferred Tax liability 126096 Income tax payable (remaining cost under tax purpose* 40% tax) 209904 Journal Entry date particulars debit credit correction entry Machinery 1200000 Accumulated Depreciation (Straight Line 10% every year) 360000 Deferred Tax liability 126096 see working Tax payable 209904 see working Retained Earnings 504000 balance Adjustment entry for the year 2016 particulars debit credit Depreciation 120000 Accumulated Depreciation 120000

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