Reference no: EM131813545

Problem: Choice Two Manufacturing, which began operations in 2011, 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                  $680,000                             $500,000                       $180,000

2012                  600,000                               560,000                        40,000

Instructions:

a) Assuming that the tax rate is 40%, 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?