Shelley Construction began operations in 2010 and appropriately used the completed-contract method in accounting for its long-term construction contracts.Effective January 1, 2012, Shelley changed to the percentage-of-completion method for both financial and tax reporting and can justify the change.Although cumulative pretax income up to January 1, 2012, was $800, 000 using the completed-contract method, cumulative pretax income would have totaled $1, 100, 000 had the percentage-of-completion method been used.Assuming an income tax rate of 30%, Shelley's 2012 financial statements should report a marginal change in its January 1, 2012 balance in Retained Earnings to restate it for the effect of the accounting change in the amount of
A)$ 0
B)$ 90, 000
C)$210, 000
D)$300, 000

Question

Quizplus · Accepted Answer

The difference in cumulative pretax income due to the change in accounting method is $300,000 ($1,100,000 - $800,000). The tax effect of this difference is 30% of $300,000, which is $90,000. Therefore, the net increase in retained earnings to reflect the change in accounting method is $300,000 - $90,000 = $210,000.

Shelley Construction Began Operations in 2010 and Appropriately Used the Completed-Contract