Response to the following problem:
Change in Accounting for Construction Contracts Since the Goode Construction Company was formed in 2009, it has used the completed-contract method for financial reporting, but at the beginning of 2011, it changes to the percentageof-completion method. The company previously had reported the following pretax income
|
|
2009
|
2010
|
|
Sales of completed contracts
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$300,000
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$800,000
|
|
Less: Cost of completed contracts
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(200,000)
|
(550,000)
|
|
Gross profit
|
$100,000
|
$250,000
|
Analysis of the accounting records discloses that the company earned the following gross profit on each of its projects based on the percentage-of-completion method:
2009 2010 2011
Project A $100,000 - -
Project B 120,000 $125,000 -
Project C - 75,000 $400,000
In 2011, the company would have reported sales and cost of completed contracts of $820,000 and $350,000, respectively, under the completed-contract method. The tax rate is 30%. The company has a simple capital structure, with 100,000 shares of common stock outstanding. It paid no dividends. Ignore other expenses (i.e., gross profit is income before income taxes). The company uses the percentage-of-completion method for income taxes.
Required:
1. Prepare the journal entry to reflect the change in method at the beginning of 2011.
2. If the company also presents the 2009 and 2010 financial statements for comparative purposes, prepare the income statement disclosures (starting with income before income taxes) and retained earnings disclosures that are required in 2011.
3. What items (if any) would be restated on the financial statements?