Question

During 2021, a construction company that began operations in 2019 changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:

Completed-Contract Percentage-of-Completion
2019 $466000 $889000
2020 615000 940000
2021 690000 1040000
$1771000 $2869000

Assuming an income tax rate of 30% for all years, the effect of this accounting change on prior periods should be reported by a credit of:________

a. $525,000 on the 2018 income statement.
b. $770,000 on the 2018 retained earnings statement.
c. $770,000 on the 2018 income statement.
d. $525,000 on the 2018 retained earnings statement.

Answer 1

Answer:

$523,600 on the 2021 retained earnings statement

Explanation:

Gross profit of 2019 under percentage-of-        $889,000

completion method

Add: Gross profit of 2020 under percentage     $940,000

-of-completion method

Less: Gross profit of 2019 under completed-     ($466,000 )

contract method

Less: Gross profit of 2020 under completed-     ($615,000)

contract method                                                                        

                                                                                  $748,000

Less: Tax ($748,000*30%)                                       $224,400

                                                                                  $523,600