Question

At the beginning of 2017, Swifty Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $114,600, and completed-contract $84,000. The tax rate is 40%. Swifty has a profit-sharing plan, which pays all employees a bonus at year-end based on 2% of pretax income.

Compute the indirect effect of Swifty’s change in accounting principle that will be reported in the 2017 income statement, assuming that the profit-sharing contract explicitly requires adjustment for changes in income numbers.

ANSWER 612

Answer 1

Difference in profit-sharing expense—prior years

Pre-tax income—percentage-of-completion..................................... $114,600

Pre-tax income—completed-contract.................................................     84,000

                                                                                                                     $ 30,600

                                                                                                                     X       2%

Indirect effect........................................................................................... $       612

The indirect effect from prior years will be reported as a profit-sharing expense for year 2017.