Question

Use the following information for questions 44 and 45. Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method. The company decided to use the same for income tax purposes. The tax rate enacted is 40. Income before taxes under both the methods for the past three years appears below.

44. What amount will be debited to Construction in Process account, to record the change at the beginning of 2015?
a. 250,000
b. 100,000
c. 150,000
d. 50,000

45. Which of the following will be included in the journal entry made by Dream Home to record the income effect?
a. A debit to Retained Earnings for 150,000
b. A credit to Retained Earnings for 150,000
c. A credit to Retained Earnings for 100,000
d. A debit to Retained Earnings for 100,000
1) 250,000
2) 100,000
3) 150,000
4) 50,000

Answer 1

The accounting question focuses on the change from the completed contract method to the percentage-of-completion method and how it affects Dream Home Inc.'s accounts. The correct entries would adjust both Construction in Process and Retained Earnings accounts.

Step-by-step explanation:

The subject of the question is accounting, specifically the change in accounting methods from the completed contract method to the percentage-of-completion method and its impact on the accounts of Dream Home Inc. When Dream Home Inc. switches its accounting method, it needs to adjust its financial statements to reflect the income as if the new method had been used all along. The change requires a journal entry that debits or credits the construction in process account and retained earnings for the cumulative effect of the change. Construction in Process is an account that records the costs associated with the construction of long-term projects; it gets debited when costs are increased. Retained Earnings represent the cumulative net income minus any dividends and are affected by the retrospective change in accounting principle, adjusting past years' income to reflect the new method.