Question

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method.

The company decided to use the same for income tax purposes. The tax rate enacted is 40%.
Income before taxes under both the methods for the past three years appears below.
2013 2014 2015
Completed contract $300,000 $200,000 $100,000
Percentage-of-completion 500,000 250,000 180,000
What amount will be debited to Construction in Process account, to record the change at beginning of 2015?
a. $250,000
b. $100,000
c. $150,000
d. $50,000

Answer 1

Option A.$250,000, is correct answer

Step-by-step explanation:

In order to determine the amount that would be debited to construction in process account for additional cost due to change from completed contract method to percentage of completion method,we need to ascertain the costs charged in years 2013 and 2014 under the old method compared the costs that should have been charged under the new method

Costs charged in 2013 and 2014=$300,000+$200,000=$500,000

Costs that should have been charged =$500,000+$250,000=$750,000

Increase in cost due change=$750,000-$500,000=$250,000