Question

A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a

a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d. credit to Deferred Tax Liability.

Answer 1

When a company switches from the percentage-of-completion method to the completed-contract method for tax purposes, a debit to Construction in Process should be recorded.

Step-by-step explanation:

When a company switches from the percentage-of-completion method to the completed-contract method for tax purposes, the entry to record this change should include a debit to Construction in Process.

This is because the percentage-of-completion method recognizes revenue and expenses as the work progresses, whereas the completed-contract method recognizes them only when the project is completed. By debiting Construction in Process, the company is adjusting the previously recognized revenue and expenses to reflect the completed-contract method.