Problem:
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
Instructions
(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?