In: Accounting
Change in Accounting Principle - Retroactive Approach
In 2017, The UC Construction Company changed from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. The company continued to use the completed-contract method for tax purposes. The tax rate is 30 percent. The comparative income statements issued previously (using the completed-contract method) showed the following:
2017 |
2016 |
2015 |
2014 |
|
Construction revenue |
$520,000 |
$480,000 |
$460,000 |
$350,000 |
Construction expenses |
410,000 |
390,000 |
300,000 |
200,000 |
Income before taxes |
110,000 |
90,000 |
160,000 |
150,000 |
Income tax expense |
33,000 |
27,000 |
48,000 |
45,000 |
Net income |
$77,000 |
$63,000 |
$112,000 |
$105,000 |
The comparative statements of retained earnings issued for the same years were:
2017 |
2016 |
2015 |
2014 |
|
Retained earnings, beg. |
$1,040,000 |
$1,007,000 |
$955,000 |
$900,000 |
Net income |
77,000 |
63,000 |
112,000 |
105,000 |
Dividends |
(35,000) |
(30,000) |
(60,000) |
(50,000) |
Retained earnings, end |
$1,082,000 |
$1,040,000 |
$1,007,000 |
$955,0000 |
For years before 2014, pretax income using the completed-contract method was $350,000. Pretax income computed for the percentage-of-completion and completed-contract methods are as follows:
Percentage |
||||
Of |
Completed |
Cumulative |
||
Completion |
Contract |
Difference |
Difference |
|
Before 2014 |
$500,000 |
$350,000 |
$150,000 |
$150,000 |
2014 |
200,000 |
150,000 |
50,000 |
200,000 |
2015 |
150,000 |
160,000 |
(10,000) |
190,000 |
2016 |
100,000 |
90,000 |
10,000 |
200,000 |
2017 |
110,000 |
100,000 |
10,000 |
210,000 |
Prepare comparative statements of retained earnings for the four years, assuming UC Construction changed its method of construction accounting from the completed-contract method to the percentage-of-completion method in 2017.
Statement of Retained earnings by completed contract method | ||||||||
2017 | 2016 | 2015 | 2014 | |||||
Retained earnings, beg. | $1,040,000 | $1,007,000 | $955,000 | $900,000 | ||||
Net income | 70,000 | 63,000 | 112,000 | 105,000 | Net income for 2017 = 100000*70% | |||
Dividends | -35,000 | -30,000 | -60,000 | -50,000 | ||||
Retained earnings, end | $1,075,000 | $1,040,000 | $1,007,000 | $9,550,000 | ||||
Statement of Retained earnings by percentage of completion method | ||||||||
2017 | 2016 | 2015 | 2014 | |||||
Retained earnings, beg. | $1,180,000 | $1,140,000 | $1,095,000 | $1,005,000 | Add 105000 the difference for prior years to 2014 retained earnings | |||
Net income | 77,000 | 70,000 | 105,000 | 140,000 | ||||
Dividends | -35,000 | -30,000 | -60,000 | -50,000 | ||||
Retained earnings, end | $1,222,000 | $1,180,000 | $1,140,000 | $1,095,000 | ||||
Percentage | ||||||||
Of | Completed | Cumulative | B= | |||||
Completion | Contract | Difference(A) | Difference | A*30% | C=A-B | |||
Before 2014 | $500,000 | $350,000 | $150,000 | $150,000 | $45,000 | $105,000 | difference for prior years | |