A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a
A) debit to Construction in Process.
B) debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
C) debit to Retained Earnings in the amount of the difference on prior years, net of tax.
D) credit to Deferred Tax Liability.

Question

Quizplus · Accepted Answer

When a company changes from percentage-of-completion to completed-contract method, they must adjust their financial statements for the difference in income recognized under the two methods for prior years. This adjustment is recorded as a cumulative-effect-type adjustment, which means it is recorded directly to retained earnings on the balance sheet. Therefore, the correct entry to record the change would include a debit to retained earnings in the amount of the difference on prior years, net of tax.

A Company Changes from Percentage-Of-Completion to Completed-Contract Method, Which Is