Question

Shamrock Construction Company, which began operations in 2020, 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. The appropriate information related to this change is as follows.
Pretax Income from
Percentage-of-Completion Completed-Contract Difference
2020 $875,000 $585,000 $290,000
2021 924,000 476,000 448,000

(a) Assuming that the tax rate is 20%, what is the amount of net income that would be reported in 2021?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principles?

Answer 1

Answer: Please refer to answer.

Explanation:

a) Since they are changing from the completed contract to percentage of completion method, we use the latter's figure in net income calculation.

In 2021, that figure is $924,000.

Adjusting it for tax we have,

= 924,000 * (1 - 0.2)

= $739,200

$739,200 is the amount of net income that would be reported in 2021.

b) The difference in income for 2020 must be accounted for to adjust the accounting records for the change in accounting principles as follows,

DR Construction Process 290,000

CR Deferred Tax Liability (290,000 * 0.2) 58,000

CR Retained Earnings (290,000 * 0.8) 232,000

If you need any clarification do react or comment.