Question - Choice Two Manufacturing, which began operations in 2011, changed from the completed contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. 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
2011 $680,000 $500,000 $180,000
2012 600,000 560,000 40,000
Instructions:
a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2012?
b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?