Headland Construction Company, which began operations in 2020, 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. The appropriate information related to this change is as follows.

Pretax Income from
Percentage-of-Completion Completed-Contract Difference
2020 $875,000 $590,000 $285,000
2021 913,000 476,000 437,000

Required:
a. Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2020?
b. What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Question

contestada

Respuesta :

abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-05-17T03:10:17+02:00

Answer:

A.$262,500

B. Dr Construction in Process $285,000

Cr Deferred Tax $85,500

Cr Retained Earnings $199,500

Explanation:

A. Calculation to determine the amount of net income that would be reported in 2020

Using this formula

2020 Net income=Income before tax*Tax rate

Let plug in the formula

2020 Net income=$875,000*30%

2020 Net income=$262,500

Therefore the amount of net income that would be reported in 2020 is $262,500

B. Preparation of the entry(ies) that are necessary to adjust the accounting records for the change in accounting principle

Dr Construction in Process $285,000

Cr Deferred Tax $85,500

(30%*$285,000)

Cr Retained Earnings $199,500

($285,000-$85,500)

(To adjust the accounting records)