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 Instructions (a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Short answer

The net income will be$455,000, and the retained earnings will be $123,500. The journal entry “construction in process” will be debited, and credit items will be deferred tax liability and retained earnings

Step-by-step solution

Calculation of net income, using the retrospective approach

Net Income = Income before income tax - Income tax

= 700,000 - (700,000 x 35%)

= $455,000

Calculation of Retained Earnings

Retained Earning = Contruction in Process x (1- tax rate)

= 190,000 x 0.6

= $123,500

Journal Entry

Date	Particulars	Debit ($)	Credit ($)
	Construction in process	190,000
	Deferred Tax liability		66,500
	Retained Earnings		123,500
	(Being change in accounting principle recorded)