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 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):

Prepare any journal entry necessary as a direct result of the error 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.)

  Year MACRS
Deductions   2013 $ 142,900   2014 244,900   2015 174,900   2016 124,900   2017 89,300   2018 89,200   2019 89,300   2020 44,600    Totals $ 1,000,000

Explanation / Answer

1.

If GYI had recorded the purchase correctly, depreciation would have been $100,000 per year in the financial statements for 2013, 2014, and 2015. Deductions on the tax return would have been $142,900 + 244,900 + 174,900 = $562,700 over the same three-year period. Instead, as a result of erroneously recording the 2013 expenditure as an expense, the tax deduction was $1,000,000. As a result, GYI owes income taxes for the three previous years of 40% x ($1,000,000 – 562,700) = $174,920.

In addition, because using straight-line depreciation in the income statement and MACRS on the tax return creates a temporary difference, GYI needs to record a deferred tax liability for the remaining seven years. After three years, the cumulative temporary difference (and thus the future deductible amount) is $262,700 as indicated in the table below. The deferred tax liability is the tax rate times that cumulative temporary difference, $105,080:

Year

MACRS Deductions

Straight-Line Depreciation

Difference

Cumulative Temporary Difference

Deferred Tax Liability

2013

$142,900

$100,000

$42,900

$42,900

$17,160

2014

244,900

100,000

144,900

187,800

75,120

2015

174,900

100,000

74,900

262,700

105,080

Machinery (cost)

1,000,0000

Accumulated depreciation (S-L depr: $100,000 x 3 years)

300,000

Deferred tax liability (40% x cumulative temporary difference)

105,080

Income tax payable (40% x [$1,000,000 – (142,900 + 244,900 + 174,900)])

174,920

Retained earnings ([$1,000,000 – 300,000] less 40% x [$1,000,000 – 300,000])

420,000

3.

Adjusting entry:

Depreciation expense                                                                    100,000

Accumulated depreciation                                                                    100,000

Year

MACRS Deductions

Straight-Line Depreciation

Difference

Cumulative Temporary Difference

Deferred Tax Liability

2013

$142,900

$100,000

$42,900

$42,900

$17,160

2014

244,900

100,000

144,900

187,800

75,120

2015

174,900

100,000

74,900

262,700

105,080

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.