Question

At the beginning of 2017, Sunland Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $130,400, and completed-contract $86,000. The tax rate is 40%.

Prepare Metlock’s 2017 journal entry to record 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

Answer 1

Step-by-step explanation:

The journal entry is shown below:

Construction in process A/c Dr $44,400

To Deferred tax liability A/c $17,760

To Retained earnings A/c $26,640

(Being the change is recorded and the remaining balance is credited to the retained earning account)

The computations are shown below:

For Construction in process:

= Pretax income under percentage-of-completion - pretax income under completed-contract

= $130,400 - $86,000

= $44,400

For Deferred tax liability:

= Difference in amount × tax rate

= $44,400 × 40%

= $17,760