5.

value: 3.00 points

Problem 20-2 Change in principle; change in method of accounting for long-term construction [LO20-2]

The Pyramid Construction Company has used the completed-contract method of accounting for construction contracts during its first two years of operation, 2011 and 2012. At the beginning of 2013, Pyramid decided to change to the percentage-of-completion method for both tax and financial reporting purposes. The following table presents information concerning the change for 20112013. The income tax rate for all years is 40%.

	Income before Income Tax
	Percentage of Completion Method			Completed Contract Method			Difference			Income Tax Effect			Difference after Tax
2011	$	87,600		$	58,400		$	29,200		$	11,680		$	17,520
2012		43,000			34,400			8,600			3,440			5,160
Total	$	130,600		$	92,800		$	37,800		$	15,120		$	22,680
2013	$	50,200		$	45,600		$	4,600		$	1,840		$	2,760

Pyramid issued 46,000 $1 par, common shares for $210,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $12,000 cash dividends were paid in both 2012 and 2013.

Required:

1.	Prepare the journal entry to record the change in accounting principle. (All tax effects except those resulting from inventory method changes should be reflected in the deferred tax liability account.) (If no entry is required for a particular event, select "No journal entry required" in the first account field.)

2.	Prepare the 20132012 comparative income statements beginning with income before income taxes. (Round EPS answers to 2 decimal places.)

3.	Prepare the 20132012 comparative statements of shareholders equity. (Hint: The 2011 statements reported retained earnings of $35,040. This is $58,400 [$58,400 40%]).