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Ventura Corporation purchased machinery on January 1, 2009 for $630,000.The company used the sum-of-the-years'-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life.In 2010, Ventura changed to the straight-line depreciation method for this asset.The following facts pertain:

-During 2011, a construction company changed from the cost-recovery method to the percentage-of-completion method for accounting purposes but not for tax purposes.Gross profit figures under both methods for the past three years appear below:

Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of

Question

Use the following information for questions.
Ventura Corporation purchased machinery on January 1, 2009 for $630,000.The company used the sum-of-the-years'-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life.In 2010, Ventura changed to the straight-line depreciation method for this asset.The following facts pertain:
 
-During 2011, a construction company changed from the cost-recovery method to the percentage-of-completion method for accounting purposes but not for tax purposes.Gross profit figures under both methods for the past three years appear below:

Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of

Quizplus · Accepted Answer

The change in accounting method from cost-recovery to percentage-of-completion affects the recognition of gross profits in prior periods. To adjust for this change, the cumulative effect from prior periods should be recognized in retained earnings as of the beginning of the period of change. The credit to retained earnings should be equal to the difference between the cumulative gross profit recognized under the old method and the cumulative gross profit that would have been recognized under the new method. In this case, the credit to retained earnings should be $390,000 ($1,200,000 - $810,000). Therefore, option D is correct. Options A, B, and C are incorrect because they do not follow the correct accounting treatment for a change in accounting method.

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