Detmer Constuction Company decided at the beginning of 2012 to change from the cost-recovery method to the percentage-of-completion method for financial reporting purposes.The company will continue to use the cost-recovery method for tax purposes.For years prior to 2012, pretax income under the two methods was as follows: percentage-of-completion £144,000, and cost-recovery £114,000.The tax rate is 35%.Detmer has a profit-sharing plan, which pays all employees a bonus at year-end based on 1.5% of pretax income.What is the amount of the indirect effect of Detmer's change in accounting policy that will be reported in the 2012 income statement, assuming that the profit-sharing contract explicitly requires adjustment for changes in income numbers?

Question

Quizplus · Accepted Answer

The indirect effect is the change in the bonus due to the change in accounting policy. The difference in pretax income is £144,000 - £114,000 = £30,000. The bonus is 1.5% of this difference, which is £30,000 * 1.5% = £450.

Detmer Constuction Company Decided at the Beginning of 2012 to Change