? Exercise E22-1
E22-1 (Change in Principle-Long-term Contracts)
Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2008. 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.
Pretax Income from:
Percentage-of-Completion Completed-Contract Difference
2007 $780,000 $ 590,000 $190,000
2008 700,000 480,000 220,000
(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2008?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?
(a) The income under the percentage of completion method is $700,000. The tax rate is 35%
Net income in 2008 = 700,000 X (1-0.35) = ...
The solution explains how to calculate the net income under percentage of completion method and the entries necessary to record the change from completed contract method to percentage of completion method