Question

Blue Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2021. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account). The appropriate information related to this change is as follows.
Pretax Income from:
Percentage-of-Completion Completed-Contract Difference
2014 $752,200 $586,700 $165,500
2015 683,500 444,700 238,800
(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2015?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Answer 1

Answer:

a. Particulars                          Amount

Pre-tax income for 2015       $683,500

Less: Income tax expenses  $205,050 ($683,500*30%)

Net Income for 2015            $478,450

b. Deferred tax liability = Temporary difference * Tax rate

= $165,500*30%

= $49,650

Income tax expense = Construction in process - Deferred tax liability

= $165,500 - $49,650

= $115,850

Date   Account titles and Explanation            Debit        Credit

2015   Construction in progress                     $165,500

                  Deferred tax liability                                        $49,650

                  Retained earnings                                           $115,850

           (To record deferred tax liability and retained earnings for 2015)