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?

(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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