A property was bought and made for use in May 2022. The property was recorded but the depreciation was not. The useful life of the addition is 10 years with a residual value of 0, and the cost for the property was 6 million. The effective income tax rate is 30%. 

 

Calculate the depreciation in straight-line for 21 months (Feb 3rd of the current fiscal period) and record the depreciation. 12 months of depreciation should be included in the current fiscal year (e.g. depreciation expense), while the remaining 9 from the previous fiscal year months should be a direct adjustment to retained earnings as it is a prior period expense. Show the journal entries necessary outlining what needs to be credited and debited by what amount (hint: including journal entries necessary for tax purposes as the depreciation was omitted), and then show adjustments that need to be made on the balance sheet. 

The answer I got developed was the following to the above question is below. Can you please explain why the 600,000 of current fiscal year depreciation is not added to the balance sheet by decreasing Property and Equipment? Don't I also need to show the balance statement decrease by 600,000 because that is the current depreciation that was missed

 

Journal Entries
Particulars	Debit	Credit
Depreciation Expense	600,000
Accumulated Depreciation		600,000
Recording current-year Depreciation
Retained Earnings	450,000
Accumulated Depreciation		450,000
Adjusting Entry for previous year depreciation
Income tax Payable	135,000
Retained Earnings		135,000
Adjusting Entry for the previous year's excessive tax Expenses

Step 2:

Balance Sheet Adjustment
Decrease: Assets	450,000
Decrease: Income Tax payable	135,000
Increase: Retained Earnings	315,000

Step 3:

Data:

Month Of Purchase	May-22
Cost of Asset	6,000,000
Life of asset	10 years
Residual Value	0
Depreciation (Current Year)	6,000,000 /10
	600,000
Depreciation 9 Months	600,000 x 9/12
	450,000
Impact on Tax	450,000 x 30%
	135,000

Answer rating: 100% (QA)

Scenario Property acquired and put to use in May 2022 The depreciation for this property was not recorded Useful life 10 years with a residual value o... View the full answer