A company changes from percentage-of-completion to cost-recovery, which is the method 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

The entry to record the change from percentage-of-completion to cost-recovery method should include a debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax. This is because the cost-recovery method results in a lower amount of revenue being recognized in the earlier years of a contract, which leads to a lower taxable income and a lower tax liability. The difference between the amount of revenue recognized under the percentage-of-completion method and the amount of revenue recognized under the cost-recovery method is a loss that must be recognized in the year of the change.

A Company Changes from Percentage-Of-Completion to Cost-Recovery, Which Is the Method