Question

In 2014 the Flynn Company has changed from the percentage-of-completion method to the completed-contract method for long-term construction contracts. The difference in pre-tax income prior to 2014 is a decrease of $60,000 and for 2014 is a

decrease of $20,000. The estimated tax effect is 40%. The journal entry made by Flynn Company should include a:
A. Debit to Deferred Tax Liability of $24,000.
B. Credit to Deferred Tax Liability of $32,000.
C. Debit to Deferred Tax Liability of $32,000.
D. Credit to Deferred Tax Liability of $24,000.

Answer 1

The journal entry made by the Flynn Company should include a credit to Deferred Tax Liability of $32,000.

Step-by-step explanation:

The journal entry made by the Flynn Company should include a Credit to Deferred Tax Liability of $32,000. When a company changes from the percentage-of-completion method to the completed-contract method, it needs to recognize the tax effect of the change. In this scenario, the decrease in pre-tax income prior to 2014 and for 2014 is $60,000 and $20,000 respectively. The estimated tax effect is 40%, which means the company needs to record a deferred tax liability of $32,000 ($80,000 * 40%) on its books.