At the beginning of 2017, Wertz Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $120,000, and completed-contract $80,000. The tax rate is 35%. Prepare Metlock's 2017 journal entry to record the change in accounting principle.

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Business

Valentina Mills

24 January, 12:13

At the beginning of 2017, Wertz Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $120,000, and completed-contract $80,000. The tax rate is 35%. Prepare Metlock's 2017 journal entry to record the change in accounting principle.

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Cruz Sanders · Answer 1

Income under completed contract = $80,000

Tax = $28,000 (0.35*80,000)

Income under percentage of completion = $120,000

Tax = 0.35*120,000 = $42,000

Income difference = 120,000-80,000 = $40,000

Tax difference = 42,000-28,000 = $14,000

Addition to retained earnings = 40,000-14,000 = $26,000

Journal Entry's

Debit Credit

Construction Revenue $40,000

Deferred tax liability $14,000

Retained Earnings $26,000