Question

Pam Erickson Construction Company changed from the completed- contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. 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
2017 $780,000 $590,000 $190,000
2018 700,000 480,000 220,000

(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2015?

Net income _____

(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Answer 1

(a) Net income is $490,000

(b) Please Journal entries as solved below;

Step-by-step explanation:

(a)Please see computation of net income below;

Net income = Income before income tax - Tax rate.

=$700,000 - ($700,000 × 30%)

= $700,000 - $210,000

=$490,000

Net income is therefore $490,000.

(b) Please see journal entries below.

Construction in process Dr $190,000

To deffered tax liability

$57,000

$190,000 × 30%

To retained earnings

$133,000

$190,000 × (100-30)%

$190,000 × 70%

(Being adjusted entry that is recorded.)