Kingbird Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2021. 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

2020 $752,200 $586,700 $165,500
2021 683,500 444,700 238,800

(a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2021?

(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

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TomShelby TomShelby · Answer 1 · 2020-04-24T07:57:36+02:00

Answer:

a) 2021 year income: 526,540

b) journal entries

income tax expense 225.660‬ debit

income tax deferred liability (*1) 49.650‬ debit

income tax payable 176.010‬ credit

Explanation:

Year Accounting Tax purpose Difference

2020 752200 586700 165500

2021 683500 444700 238800

2021

752,200 x 30% = 225,660

after tax income: 526.540‬

2022

683,500 x 30% = 205,050

after tax income: 478.450‬

We recognize the income tax expense n the accounting method of revenue/expense recognizition

while, the payable will use the goverment purposes.

Then, the differnce wi considered either income tax deferred.

*1 it is a liability as the company is paying lower taxes to day to pay more than before.