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
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting
Pretax Income 700,000
Less: Income tax 245,000
The solution examines the change in principle for long-term contracts. The amount of net income that would be reported is determined.