Question

Tamarisk Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. 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 2017 $714,000 $647,000 $67,000 2018 642,000 512,000 130,000 (a) Assuming that the tax rate is 30%, what is the amount of net income that would be reported in 2018? Net income $ (b) What entry is necessary to adjust the accounting records for 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.)

Answer 1

Particulars	2017(amount in $)	2018 (amount in $)
Accounting income (A)	647,000	642,000
Taxable income (B)	647,000	512,000
Timing Difference (D)	0	130,000
Current Tax @ 30% (A*30%)	194,100	153,600
Deffered Tax (D* 30%)	0	39,000
Total tax expense	194,000	192,600
Net Income	452,900	449,400

Deffered tax computation:-

Particulars	2017 (amount in $)	2018 (amount in $)
Opening balance of timing difference	0	0
Addition	0	130,000
Deletion	0	0
Closing timing difference	0	130,000
Deffered Tax @30%	0	39,000
Deffered tax Asset/ Liability	-	Creation of deffered tax liability
Journal Entry	No entry	P&L A/C   Dr. 39000 To DTL Cr. 39000