Question

Blue Construction Company 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. (Hint: Adjust all tax consequences through the Deferred Tax Liability account). The appropriate information related to this change is as follows.

Pretax Income from:
Percentage-of-Completion Completed-Contract Difference
2014 $752,200 $586,700 $165,500
2015 683,500 444,700 238,800
(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2015?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Answer 1

a. Particulars Amount

Pre-tax income for 2015 $683,500

Less: Income tax expenses $205,050 ($683,500*30%)

Net Income for 2015 $478,450

b. Deferred tax liability = Temporary difference * Tax rate

= $165,500*30%

= $49,650

Income tax expense = Construction in process - Deferred tax liability

= $165,500 - $49,650

= $115,850

Date Account titles and Explanation Debit Credit

2015 Construction in progress $165,500

Deferred tax liability $49,650

Retained earnings $115,850

(To record deferred tax liability and retained earnings for 2015)