Question

Changes in Accounting for Construction contractsDelta Company uses the Completed-Contract method of

accounting for long-term construction contracts. Delta started business in 2011 and prepared the following income statements:

                                                                2011                                                 2012

Construction revenue                       $100,000                                           $300,000

 Construction expense                         (40,000)                                          (130,000)

 Other expenses                                    (50,000)                                            (70,000)

 Income before income taxes            $ 10,000                                           $100,000

 Income tax expense(30%)                      3,000                                               30,000

 Net income                                           $  7,000                                            $ 70,000

Earning per share                                  $   0.07                                               $  0.07

 The company changes to the percentage-of-completion method at the beginning of 2013. It determines the construction revenue and expense amount under the percentage-of-completion method to be as follows:

                                                2011                               2012                               2013                 

 construction revenue      $200,000                        $420,000                        $900,000

 Construction expense         80,000                          182,000                            420,000

 The other expenses remain unchanged for 2011 and 2012 and are $80,000 in 2013. Delta has not paid dividends on its 100,000 common shares outstanding. With the 2013 financial statements, the company issues comparative statements for the previous two years. Under the completed-contract method, construction revenue and construction expense would be $600,00 and $280,000, respectively, in 2013. Delta uses the percentage-of-completion method for income tax purposes.

 1. Prepare the journal entry to reflect the change. If an amount box does not require an entry, leave it blank.

                Construction in process

                Deferred Tax Liability

                Retained Earning

 2. prepare the comparative income statements for 2013, 2012, and 2011.

                                                          Delta company

                                             Condense comparative Income statements

                                                                    2011- 2013

                                         2013                                        2012                                              2011

 Construction revenue

 Construction expense

 Other expenses

 Income Before income taxes

 Income tax expense

 Net income

Earning per share

 Prepare the comparative statements of Retained Earnings for 2013, 2012, and 2011. If an amount is zero, enter”0″.

                                                                    Delta Company

                                                 Comparative statements of retained Earnings

                                                                        2011-2012

                                                             2013                                      2012                                                         2011

 balance at beginning of year, as previously reported

 Add: Prior years cumulative ef

 Balance at the beginning of year, as adjusted

 Net income

 balance at end of year

 

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