Question

# Change in Accounting Principle - Retroactive Approach In 2017, The UC Construction Company changed from the...

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.

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*