McGregor Biomed undertook a research and development project in 2014. As of May 1 of that year, management concluded that the project had met the requirements for the capitalization of development costs. For the remainder of 2014 and 2015, the company capitalized $3.4 million of development costs for the project. Capitalizing these costs helped McGregor to remain profitable; had these costs been expensed, the company would have reported losses. In 2016, McGregor began amortizing the development cost over the estimated useful life of 10 years, beginning with a full year of amortization in 2016. 

In 2019, in preparation for an initial public offering (IPO), the company engaged a public accounting firm to conduct an external audit of its financial statements. The auditors concluded that the development cost did not meet the criteria for capitalization. Specifically, it was their opinion that McGregor, at the time, did not demonstrate that the company had sufficient financial resources to complete the development project due to the recurring operating losses incurred. After some heated debate, McGregor’s management agreed with the auditors’ position in order to obtain an unqualified audit opinion. The company had not yet recorded any amortization for 2019 when it agreed to correct the error. The company’s tax rate is 20%.

Required:

Record the journal entries necessary to correct McGregor’s accounts. Include the effect of income taxes.