Question

Using the below information fill in the answers to parts (a), (b) and (c) for a change in accounting principle

Partial Income Statement using Completed- contract-method for its long-term construction contracts:

	2015	2016	2017
Income before taxes	400,000	160,000	190,000
Income tax expense (40%)	160,000	64,000	76,000
Net Income	240,000	96,000	114,000

Partial Income Statement using Cost-to-Cost-method for its long-term construction contracts:

	2015	2016	2017
Income before taxes	600,000	180,000	200,000
Income tax expense (40%)	240,000	72,000	80,000
Net Income	360,000	108,000	120,000

a)The company wants to change to the Cost-to-Cost-method beginning in 2017. Prepare the comparative Income Statement for 2016 and 2017 below:

	2016	2017
Income before taxes
Income tax expense (40%)
Net Income

b)Prepare the journal entry at the beginning of 2016 to adjust retained earnings (as this is the BEGINNING of the earliest period presented):

	Debit	Credit

c)Assume a retained earnings balance of $1,360,000 as of the beginning of 2015 and NO dividends were paid in any of the years. Prepare the Statement of Changes in Retained Earnings for 2016 and 2017 using the following information for 2015:

	2015
Beginning retained earnings	1,360,000
+ Net Income	240,000
Ending retained earnings	1,600,000

	2016	2017
Retained Earnings, January 1
Adjustment for Cumulative Effect on Prior Years Of Retrospectively applying the Cost-to-Cost-method for its long-term construction contracts.
Retained Earnings, January 1, as adjusted
Net Income
Retained Earnings, December 31

Answer 1

a)		2016	2017
	Income before taxes	$    180,000.00	$    200,000.00
	Income tax expense (40%)	$      72,000.00	$      80,000.00
	Net Income	$    108,000.00	$    120,000.00
		Dr	Cr
b)	Construction in progress	$    200,000.00
	Tax payable		$      80,000.00
	Retained Earning		$    120,000.00
		2015
c)	Beginning retained earnings	$ 1,360,000.00
	+ Net Income	$    240,000.00
	Ending retained earnings	$ 1,600,000.00
			2016	2017
	Retained Earnings, January 1		$      1,600,000	$      1,696,000
	Adjustments for cumulative Effect on Prior Years of Retrospectively applying the Cost-to- Cost method for its long term construction contracts		$         120,000	$         132,000
	Retained Earnings January 1, Adjusted		$      1,720,000	$      1,828,000
	Net Income		$         108,000	$         120,000
	Retained Earnings, December 31		$      1,828,000	$      1,948,000