Question

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

Answer 1

Answer:

a. $478,450

b.Dr Construction in Process $165,500

Cr  Deferred tax liability  $49,650

Cr   Retained earnings  $115,850

Explanation:

A. Calculation for the amount of net income that would be reported in 2015 for Pam Erickson Construction Company

Using this formula

Net income =(Income before income tax ) Income before income tax-Tax rate

Let plug in the formula

Net income= $683,500 - (683,500 × 30%)

Net income= $683,500 - $205,050

Net income= $478,450

B. Preparation of the Journal entry(ies) that are necessary to adjust the accounting records

For Pam Erickson Construction Company

Dr Construction in Process $165,500

Cr  Deferred tax liability  $49,650

($165,500 × 30%)

Cr   Retained earnings  $115,850

($165,500 × (100%-30%)