Effects of Retroactive Adjustment:
Percentage-of-Completion Method
Ace Construction Company accounted for all its long-term contracts on a deferred basis; that is, all revenue and expenses were deferred until the completion of the contract when all the costs were known with certainty. Although this is a on servative approach, Ace has been having difficulty with its auditors and with the IRS over this approach. It now desires to shift to a percentage-of-completion method. Assume that only one such contract is to be changed at this time. This contract for $5,000,000 was initiated four years ago, and an equal amount of work was done each year. The contract work cost the firm $4,000,000.
Required
a. Show the effects of the $5,000,000 on the accounting equation, assuming that it was all reported as income in the final year.
b. Show the effects on the accounting equation of a retroactive adjustment to the firm’s financial statements for each of the contract years.
c. Does this set of adjustments seem important to investors or financial analysts?
Does it seem to be a useful adjustment that would be viewed as helpful by the readers of the firms’ financial statements? Why?
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