Question

Bonita 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.

Percentage-of-Completion Completed-Contract Difference
2014 $752,200 $586,700 $165,500
2015 683,500 444,700 238,800

Required:
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) Net income that would be reported in 2015 is $478,450

(b) The entries necessary are Construction in process (Debit), Deferred tax liability ( Credit) and Retained earning (Credit).

​Explanation:

          Percentage-of-Completion   Completed-Contract          Difference

2014        $752,200                              $586,700                       $165,500

2015        $683,500                              $444,700                       $238,800

(a) Pre-tax income for 2015 = $683,500

Income tax expense = 30% × $683,500

= $205,050

Net income = Pre-tax income - income tax expense

= $683,500 - $205,050

= $478,450

(b) Deferred tax liability = Temporary difference×Tax rate

= $165,500 × 30%

= $49,650

​Retained earning = Construction in process − Deferred tax liability

=$165,500 − $49,650

=$115,850

The entries necessary are Construction in process (Debit), Deferred tax liability ( Credit) and Retained earning (Credit).

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