Question

At the beginning of 2017, Wertz Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $120,000, and completed-contract $80,000. The tax rate is 35%. Prepare Metlock’s 2017 journal entry to record the change in accounting principle.

Answer 1

Answer:

Income under  completed contract= $80,000

Tax= $28,000  (0.35*80,000)

Income under percentage of completion = $120,000

Tax= 0.35*120,000= $42,000

Income difference = 120,000-80,000= $40,000

Tax difference = 42,000-28,000= $14,000

Addition to retained earnings= 40,000-14,000= $26,000

Journal Entry's

                                            Debit                                 Credit

Construction Revenue           $40,000

Deferred tax liability                                                       $14,000

Retained Earnings                                                         $26,000

Explanation: