Question

Question: At the beginning of 2017, Wertz Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion \(120,000, and completed-contract \)80,000. The tax rate is 35%. Prepare Wertz’s 2017 journal entry to record the change in accounting principles.

Short answer

Answer

The deferred tax liability is $14,000 and in journal entry construction in progress is debited, deferred tax liability and retained earnings are credited.

Step-by-step solution

Calculation of deferred tax liability

$$\begin{gathered} \mathbf{Deferred}\mathbf{}\mathbf{Taxability}\mathbf{=}\mathbf{Completed}\mathbf{}\mathbf{reported}\mathbf{\times }\mathbf{Tax}\mathbf{}\mathbf{rate} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\left(\$120,000-\$80,000\right)\mathbf{\times }\mathbf{35}\mathbf{\%} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000} \end{gathered}$$

Journal entry

Date	Particulars	Debit ($)	Credit ($)
2017	Construction in Progress	40,000
	Deferred Tax Liability		14,000
	Retained Earnings		26,000
	(Being change in accounting principle is recorded)