Dream Home Inc., a real estate developing company, was accounting for its long-t

Question

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method.
The company decided to use the same for income tax purposes. The tax rate enacted is 40%.
Income before taxes under both the methods for the past three years appears below.

What amount will be debited to Construction in Process account, to record the change at beginning of 2015? What is the journal entry made by Dream Home to record the income effect?

*answer is $250,000 and credit retained earnings $150,000, I'm just not sure how to get it :))

2013 2014 2015 completed contract $300,000 $200,000 $100,000 % of completion $500,00 $250,000 $180,000

Explanation / Answer

Completed contract before 2015 = Completed in 2013 + Completed in 2014

                                                     = $300,000 + $200,000

                                                     = $500,000

Allocated percentage of completion = Percentage in 2013 + Percentage in 2014

                                                          = $500,000 + $250,000

                                                          = $750,000

Beginning construction in process of 2015 = Percentage of completion – Completed contract

                                                                           = $750,000 - $500,000

                                                                           = $250,000

Retained earnings = $250,000 * (1 - tax rate)

                           = $250,000 * (1 - 0.40)

                           = $250,000 * 0.60

                           = $150,000

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