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5 July, 03:59

Bonita Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2021. 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.

Percentage-of-Completion Completed-Contract Difference

2014 $752,200 $586,700 $165,500

2015 683,500 444,700 238,800

Required:

a. Assuming that the tax rate is 30%, 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?

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  1. 5 July, 06:20
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    (a) Net income that would be reported in 2015 is $478,450

    (b) The entries necessary are Construction in process (Debit), Deferred tax liability (Credit) and Retained earning (Credit).

    Explanation:

    Percentage-of-Completion Completed-Contract Difference

    2014 $752,200 $586,700 $165,500

    2015 $683,500 $444,700 $238,800

    (a) Pre-tax income for 2015 = $683,500

    Income tax expense = 30% * $683,500

    = $205,050

    Net income = Pre-tax income - income tax expense

    = $683,500 - $205,050

    = $478,450

    (b) Deferred tax liability = Temporary difference*Tax rate

    = $165,500 * 30%

    = $49,650

    Retained earning = Construction in process - Deferred tax liability

    =$165,500 - $49,650

    =$115,850

    The entries necessary are Construction in process (Debit), Deferred tax liability (Credit) and Retained earning (Credit).
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