Skysong Construction Company changed from the completed-contract to the percenta

Question

Skysong Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. 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

(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2018?

(b) What entry is necessary to adjust the accounting records for the change in accounting principle? (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Pretax Income from:

Percentage-of-Completion

Completed-Contract

Difference

2017 $750,000 $623,000 $127,000 2018 674,000 518,000 156,000

Explanation / Answer

(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2018?

Pre Tax Income                       $6,74,000

Income tax expense@30%      $2,02,200

Net income                              $4,71,800

Amount of net income that would be reported in 2018 = $4,71,800

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

Account Titles and Explanation

Debit

Credit

Construction in Process

$1,27,000

    Deferred Tax Liability (127000 x 0.30)

$38,100

    Retained Earnings (127000 x 0.70)

$88,900

Account Titles and Explanation

Debit

Credit

Construction in Process

$1,27,000

    Deferred Tax Liability (127000 x 0.30)

$38,100

    Retained Earnings (127000 x 0.70)

$88,900

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