Pam Erickson Construction Company changed from the completed-contract to the per
ID: 2452680 • Letter: P
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
(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2015?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?
Pretax Income from:
Percentage-of-Completion
Completed-Contract
Difference
2014 $780,000 $590,000 $190,000 2015 700,000 480,000 220,000Explanation / Answer
Ans (a) Net income 71,500.00 Change in accounting principle to be recognized in Retained earning 71,500.00 Ans (b) Unbilled revenue( Work in process) 2,20,000.00 Construction revenue 1,10,000.00 Retained earnings 71,500.00 Deferred tax Liability 38,500.00 Workings 2014 2015 Cum Completed Contract 5,90,000 4,80,000.00 10,70,000 % of completion 5,90,000 7,00,000.00 12,90,000 Additional income recognizable from % of completion method 2,20,000 Revenue as per completed contract method 2014 5,90,000.00 Revenue as per completed contract method 2015 4,80,000.00 Cumulative 10,70,000.00 Un reconized potion in % of competion method 2,20,000.00 Un reconized potion relating to 2014 220000-(700000-590000) 1,10,000.00 Un reconized potion relating to 2015 1,10,000.00
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