Question

Headland Construction Company, which began operations in 2020, changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2021. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows.

Pretax Income from
Percentage-of-Completion Completed-Contract Difference
2020 $875,000 $590,000 $285,000
2021 913,000 476,000 437,000

Required:
a. Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2020?
b. What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Answer 1

A.$262,500

B. Dr Construction in Process $285,000

Cr Deferred Tax $85,500

Cr Retained Earnings $199,500

Step-by-step explanation:

A. Calculation to determine the amount of net income that would be reported in 2020

Using this formula

2020 Net income=Income before tax*Tax rate

Let plug in the formula

2020 Net income=$875,000*30%

2020 Net income=$262,500

Therefore the amount of net income that would be reported in 2020 is $262,500

B. Preparation of the entry(ies) that are necessary to adjust the accounting records for the change in accounting principle

Dr Construction in Process $285,000

Cr Deferred Tax $85,500

(30%*$285,000)

Cr Retained Earnings $199,500

($285,000-$85,500)

(To adjust the accounting records)