Question

At the beginning of 2017, Stellar 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 $114,200, and completed-contract $79,400. The tax rate is 40%.

Prepare Stellar’s 2017 journal entry to record the change in accounting principle. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Answer 1

Pre tax under % completion method. =. $114,200 Pre tax under completed - method =. $79,400 % completed reported=. $34,800. Higher Tax rate= 40% Deferred Tax Liability= $34800*40%=$13920 Journal entry: Account title Debit Credit Construction in progress $ Defferred Tax liability 34,800 13,920 Retained Earnings 20,880