Shelley Construction Began Operations in 2016 and Appropriately Used the Completed-Contract

question 54

Essay

Shelley Construction began operations in 2016 and appropriately used the completed-contract method in accounting for its long-term construction contracts. The prepared the following information: $$\begin{array} { l r r r } { \text { Completed-Contract Method } } & { \mathbf { 2 0 1 6 } } & { \mathbf { 2 0 1 7 } } & { \mathbf { 2 0 1 8 } } \\\hline \text { Construction Revenue } & \$ 1,775,000 & \$ 1,977,500 & \$ 2,274,125 \\\text { Expenses } & \underline { 975,000 } & \underline { 1,002,500 } & \underline { 1,152,875 } \\\text { Income before income taxes } & \$ 800,000 & \$ 975,000 & 1,121,250\end{array}$$ Effective January 1, 2018, Shelley changed to the percentage-of-completion method tax reporting and can justify the change? the company's tax rate is 35%. It determines the construction and revenue expense amounts under the percentage of completion method to be: $$\begin{array} { l r r r } \text { Percentage-of-Completion } & { \mathbf { 2 0 1 6 } } & { \mathbf { 2 0 1 7 } } & { \mathbf { 2 0 1 8 } } \\\hline \text { Construction Revenue } & \$ 2,200,000 & \$ 2,530,000 & \$ 2,909,500 \\\text { Expenses } & \underline { 1,100,000 } & \underline { 1,232,000 } & \underline { 1,478,400 } \\\text { Income before income taxes } & \$ 1,100,000 & \$ 1,298,000 & \$ 1,431,100\end{array}$$ Required:
1) How would the company account for the change?
2) Prepare the journal entries to reflect the changes.

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Definitions:

Direct Labor-Hours

The total hours of labor directly involved in manufacturing products or providing services.

Total Manufacturing Cost

The aggregate of all expenses related to the production of goods, including materials, labor, and overhead.

Work in Process

Inventory that is in the production process but is not yet complete.

Overapplied Overhead

A situation where the overhead costs allocated for products or services exceed the actual overhead costs incurred.