d. none UI ile dov. 23.During 2018, a construction company changed from the comp
ID: 2556473 • Letter: D
Question
d. none UI ile dov. 23.During 2018, a construction company 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 $ 800,000 2016 $ 475,000 950,000 2017 625,000 2018 1.050,000 700.000 S1.800.000 $2.800.000 Assuming an income tax rate of 40% for all years, the effect of this accounting change on prior periods should be reported by a credit of a. $600,000 on the 2018 income statement. b. $390,000 on the 2018 income statement. C. $600,000 on the 2018 retained earnings statement. d. $390,000 on the 2018 retained earnings statement.Explanation / Answer
Answer is d. $390,000 on 2018 retained earnings account.
Explanation:
Profits as per Percentage completion method for 2016 and 2017 (800,000+950,000): $1750,000
Less: Profits as per Completed contracts method for 2016 and 2017(475000+625000): $1100,000
Difference in Profits for change (increase in net profits): $650,000
Less: tax @40% $260,000
Net increase in profits due to change to be transferred to retained earnings: $390,000
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