Talia Construction Company Ltd. changed from the
completed-contract to the percentage-of-completion method of accounting for
long-term construction contracts during 2011. For tax purposes, the company
uses the completed-contract method and will continue this approach in the
future. Talia follows ASPE. The appropriate information related to this change
is as follows:
Pre-Tax Income Using:
Percentage of completion Completed
Contract Difference
2010 820,000 620,000 200,000
2011 700,000 480,000 220,000
Instructions
(a) Assuming that the change qualifies as a change in accounting
policy and that the tax rate is 35%, calculate the net income to be reported in
2011.
(b) Provide the necessary entry(ies) to adjust the accounting
records for the change in accounting policy.
(c) If this change was made to reflect changed circumstances,
how should the change be accounted for?
(a) The net income to be reported in 2011, would be
computed as follows:
Income
before income taxes $700,000
Income
taxes:
Current
(35% X $480,000) $168,000
Future
[35% X ($700,000 – $480,000)] 77,000 245,000
Net income $455,000
(b) Construction
in Process............... 200,000
Future
Income Tax Liability....... 70,000
Retained
Earnings................. 130,000*
*($200,000 X
(1 – 35%) = $130,000)
(c) This would
not be recognized as a change in policy since the new policy is appropriate for
the changed circumstances. The change would be accounted for prospectively, to
be reflected in the current income statement only with no restatement of
opening balances or of previous years’ financial results.
