Changes in Accounting for Construction contracts

Delta Company uses the Completed-Contract method of accounting for long-term construction contracts. Delta started business in 2011 and prepared the following income statements:

2011 2012

Construction revenue $100,000$300,000

Construction expense(40,000)(130,000)

Other expenses (50,000)(70,000)

Income before income taxes $ 10,000 $100,000

Income tax expense(30%)3,000 30,000

Net income $ 7,000$ 70,000

Earning per share $ 0.07 $ 0.07

The company changes to the percentage-of-completion method at the beginning of 2013. It determines the construction revenue and expense amount under the percentage-of-completion method to be as follows:

2011 2012 2013

construction revenue $200,000$420,000 $900,000

Construction expense80,000182,000 420,000

The other expenses remain unchanged for 2011 and 2012 and are $80,000 in 2013. Delta has not paid dividends on its 100,000 common shares outstanding. With the 2013 financial statements, the company issues comparative statements for the previous two years. Under the completed-contract method, construction revenue and construction expense would be $600,00 and $280,000, respectively, in 2013. Delta uses the percentage-of-completion method for income tax purposes.

1. Prepare the journal entry to reflect the change. If an amount box does not require an entry, leave it blank.

Construction in process

Deferred Tax Liability

Retained Earning

2. prepare the comparative income statements for 2013, 2012, and 2011.

Delta company

Condense comparative Income statements

2011- 2013

2013 2012 2011

Construction revenue

Construction expense

Other expenses

Income Beforeincome taxes

Income tax expense

Net income

Earning per share

Prepare the comparative statements of Retained Earnings for 2013, 2012, and 2011. If an amount is zero, enter"0".

Delta Company

Comparative statements of retained Earnings

2011-2012

2013 2012 2011

balance at beginning of year, as previously reported

Add: Prior years cumulative ef

Balance at the beginning of year, as adjusted

Net income

balance at end of year