1. Williams Construction Company changed from the cost-recovery to the percentag

Question

1.

Williams Construction Company changed from the cost-recovery to the percentage-of-completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the cost-recovery 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      Cost-Recovery Difference

2014                                                    $1,150,000                  $835,000                     $315,000

2015                                                         980,000                    600,000                       380,000

Instructions

(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2015?

(b) What entry(ies) is necessary to adjust the accounting records for the change in accounting policy?

Explanation / Answer

a)

b)

Income Before Tax                          980,000.00 Income Tax Expenses(35%)                          343,000.00 Net Income                          637,000.00

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