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16 September, 07:26

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.

2013 2014 2015

Completed contract $300,000 $200,000 $100,000

Percentage-of-completion 500,000 250,000 180,000

What amount will be debited to Construction in Process account, to record the change at beginning of 2015?

a. $250,000

b. $100,000

c. $150,000

d. $50,000

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Answers (1)
  1. 16 September, 10:11
    0
    Option A.$250,000, is correct answer

    Explanation:

    In order to determine the amount that would be debited to construction in process account for additional cost due to change from completed contract method to percentage of completion method, we need to ascertain the costs charged in years 2013 and 2014 under the old method compared the costs that should have been charged under the new method

    Costs charged in 2013 and 2014=$300,000+$200,000=$500,000

    Costs that should have been charged = $500,000+$250,000=$750,000

    Increase in cost due change=$750,000-$500,000=$250,000
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