i. Retained earnings at the beginning of the earliest period presented, and ii.

Question

i. Retained earnings at the beginning of the earliest period presented, and ii. Retained earnings that would have been reported at the beginning of The amount of cumulative effect is equal to the ditterence Belweer retrospectively for all prior periods, by recognizing only the direct effects and related i effect. period presented if the new accounting principle had been applied percentage-of completion method in accounting for all of its long-term construction contracts. Prior to 2015, Harb the completed contract method for some of its contracts. Harbor's effective tax rate is 30% F purposes. Harbor continues to use the completed contract method for all its contracts. Contract information is as follows: Example 2: On January 1, 2015, Harbor Construction Company decided to switch to the or income tax Pretax income from Percentage-of-completion Completed Contract $800,000 $600,000 Prior to 2015 What is the cumulative effect of the change? . The FASB requires that changes in accounting principle should be recognized by adjusting beginning retained earmings in the earliest period presented for the cumulative effect of the chane and if prie

Explanation / Answer

percentage of completion 1 Income before tax           800,000 2 Tax           240,000 3 (1-2) Net income after tax           560,000 completed contract 4 Income before tax           600,000 5 Tax           180,000 6 (4-5) Net income after tax           420,000 7 (1-4) income difference           200,000 8 (2-5) deffered tax liability              60,000 (taxable in future) 9 (7-8) NET EFFECT           140,000

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