Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2015. 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?

Net income $Entry field with incorrect answer

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

Question

Danielle

Business

27 February, 11:44

Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2015. 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?

Net income $Entry field with incorrect answer

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

+4

Answers (1)

Know the Answer?

Jamal Bradley · Answer 1

a. $478,450

b. The Journal entry is given below:-

Explanation:

a. The computation of net income is shown below:-

Net income = Income before income tax - Tax rate

= $683,500 - (683,500 * 30%)

= $683,500 - $205,050

= $478,450

b. The Journal entry is shown below:-

Construction in Process Dr, $165,500

To Deferred tax liability $49,650

($165,500 * 30%)

To Retained earnings $115,850

($165,500 * (100 - 30)

($165,500 * 70%)

(Being adjusted entry is recorded)