(Change in Principle—Long-Term Contracts) Cherokee Construction Company began operations in 2011 and changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. 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 |
|
|
2011 |
$780,000 |
$610,000 |
$170,000 |
|
2012 |
700,000 |
480,000 |
220,000 |
Instructions
(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2012?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?