Question

During 2015, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
Completed-Contract Percentage-of-Completion
2013 $ 475,000 $ 900,000
2014 625,000 950,000
2015 700,000 1,050,000
$1,800,000 $2,900,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of:____________

Answer 1

Answer:

$450,000

Explanation:

Calculation to determine , the affect of this accounting change on prior periods that should be reported by a credit of:

Using this formula

Accounting change on prior periods=(2013 Percentage-of-Completion+2014 Percentage-of-Completion)-(2013 Completed-Contract+2014 Completed-Contract)*(1-Tax rate)

Let plug in the formula

Accounting change on prior periods=[($900,000+$950,000)-($475,000+$625,000)]*(1-40%)

Accounting change on prior periods=($1,850,000-$1,100,000)*0.60

Accounting change on prior periods=$750,000*.60

Accounting change on prior periods=$450,000

Therefore Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of:$450,000