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Chapter 22: Q22-1BE (page 1306)

Question: At the beginning of 2017, Wertz Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion \(120,000, and completed-contract \)80,000. The tax rate is 35%. Prepare Wertz’s 2017 journal entry to record the change in accounting principles.

Short Answer

Expert verified

Answer

The deferred tax liability is $14,000 and in journal entry construction in progress is debited, deferred tax liability and retained earnings are credited.

Step by step solution

01

Calculation of deferred tax liability

DeferredTaxability=Completedreported×Taxrate=($120,000-$80,000)×35%=$14,000

02

Journal entry

Date

Particulars

Debit ($)

Credit ($)

2017

Construction in Progress

40,000

Deferred Tax Liability

14,000

Retained Earnings

26,000

(Being change in accounting principle is recorded)

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