Cherokee Construction Company changed from the cost-recovery to the percentage-of-completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the cost-recovery 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.

Instructions

(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2015?

(b) What entry(ies) is necessary to adjust the accounting records for the change in accounting policy?

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2014 2015 Pretax Income from Percentage-of-Completion Cost-Recovery Difference $780,000 $610,000 $170,000 700,000 480,000 220,000