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Percentage of Completion Method

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1)Pan 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 in 2007 $780,000, and completed-contract $590,000 and difference $190,000, in 2008 percentage-0f-completion $700,000, completed-contract $480,000 and difference $220,000.
An Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2008?
b-What entry (is) is necessary to adjust the accounting records for the change in accounting principle.

2) List below is various types of accounting changes and errors.
1-Change in a plant asset's salvage value
2Change due to overstatement of inventory
3-Change from sum-of-the-years'-digits to straight-line method of depreciation
4- Change from presenting unconsolidated to consolidated financial statements
5- Change from LIFO to FIFO inventory method
6- Change in the rate used to compute warranty costs
7- Change from an unacceptable accounting principle to an acceptable accounting principle
8- Change in a patent's amortization period
9- Change from completed-contract to percentage-of-completion method on contribution contracts
10- Change from FIFO to average-cost inventory method
for each change or error, indicate how it would be accounted for using the following letters:
a) Accounted for prospectively
b) Accounted for retrospectively
c) Neither of the above

3) Gerald Engle hart Industries changed room the double-declining balance to the straight-line method in 2008 on all its plant assets. There was no change in the assets' salvage values or useful lives. Plant assets, acquired on January 2, 2005, had an original cost of $1,600,000, with a $100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was $270,000 in 2007 and $300,000 in 2008.
a) Prepare the entry (if any) to record the change in depreciation method in 2008
b) Starting with income before depreciation expense; prepare the remaining portion of the income statement for 2007 and 2008.

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Solution Summary

Percentage of completion methods are examined.

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Question 1A
480,000*(1-35%) = 312,000

Question 1B
DR: Construction in progress 190,000
CR: Deferred income tax liability 66,500
CR: Retained earnings 123,500

190,000*(1-35%) = 123,500

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