During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
A) $600,000 on the 2008 income statement.
B) $390,000 on the 2008 income statement.
C) $600,000 on the 2008 retained earnings statement.
D) $390,000 on the 2008 retained earnings statement.

Question

During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
 Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
A) $600,000 on the 2008 income statement. 
B) $390,000 on the 2008 income statement. 
C) $600,000 on the 2008 retained earnings statement. 
D) $390,000 on the 2008 retained earnings statement.

Quizplus · Accepted Answer

[($800,000 + $950,000) - ($475,000 + $625,000)] × (1 - .40) = $390,000.

During 2008, a Construction Company Changed from the Completed-Contract Method