(Change in Principle-Long-term Contracts) Choice Two Manufacturing Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2014. 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
2013 $680,000 $500,000 $180,000
2014 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 2014?
(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?