Question

Change in Accounting Principle - Retroactive Approach

In 2017, The UC Construction Company changed from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. The company continued to use the completed-contract method for tax purposes. The tax rate is 30 percent. The comparative income statements issued previously (using the completed-contract method) showed the following:

	2017	2016	2015	2014
Construction revenue	$520,000	$480,000	$460,000	$350,000
Construction expenses	410,000	390,000	300,000	200,000
Income before taxes	110,000	90,000	160,000	150,000
Income tax expense	33,000	27,000	48,000	45,000
Net income	$77,000	$63,000	$112,000	$105,000

The comparative statements of retained earnings issued for the same years were:          

	2017	2016	2015	2014
Retained earnings, beg.	$1,040,000	$1,007,000	$955,000	$900,000
Net income	77,000	63,000	112,000	105,000
Dividends	(35,000)	(30,000)	(60,000)	(50,000)
Retained earnings, end	$1,082,000	$1,040,000	$1,007,000	$955,0000

For years before 2014, pretax income using the completed-contract method was $350,000. Pretax income computed for the percentage-of-completion and completed-contract methods are as follows:     

	Percentage
	Of	Completed		Cumulative
	Completion	Contract	Difference	Difference
Before 2014	$500,000	$350,000	$150,000	$150,000
2014	200,000	150,000	50,000	200,000
2015	150,000	160,000	(10,000)	190,000
2016	100,000	90,000	10,000	200,000
2017	110,000	100,000	10,000	210,000

Required: (answer must be typed and in good form)

Prepare comparative income statements for the four years, assuming UC Construction changed its method of construction accounting from the completed-contract method to the percentage-of-completion method in 2017.

Prepare comparative statements of retained earnings for the four years, assuming UC Construction changed its method of construction accounting from the completed-contract method to the percentage-of-completion method in 2017.

Prepare the journal entry required on UC Constructions books in 2017 to record the cumulative effect of the prior year restatement.

Answer 1

Completed Contract Method

The UC Construction Company

Income Statement

For the Year Ended …..

	2014	2015	2016	2017
Income before Income Tax	150000	160000	90000	100000
Less: Income Tax (30%)	45000	48000	27000	30000
Net Income	105000	112000	63000	70000

Percentage of Completion Method

The UC Construction Company

Income Statement

For the Year Ended …..

	2014	2015	2016	2017
Income before Income Tax	200000	150000	100000	110000
Less: Income Tax (30%)	60000	45000	30000	33000
Net Income	140000	105000	70000	77000

Journal Entry

Construction in Process                                              210000*

                  To Deferred Tax Liability (210000*30%)                63000

                  To Retained Earnings (210000*70%)                       147000

(Being, change in principle so using the retrospective approach)

*Gross Profit under Percentage of Completion Method     1060000

(500000 + 200000 + 150000 + 100000 + 110000

Gross Profit under Completed Contract Method                    -850000

(350000 + 150000 + 160000 + 90000 + 100000)

  210000*