Assume now that Cole Construction Company from BE21-5 compensates its management team by offering a base salary and a 2% bonus based on reported earnings before tax. The bonus plan requires adjustment for changes in accounting methods that includes prior bonus awards. Compute the effect of the accounting change on management compensation, indicating if it is a direct or indirect effect of the accounting change and how Cole should report it in the financial statements.
In BE21-5
Cole Construction Company elected to change its method of accounting from the completed contract method to the percentage-of-completion method. Prior years’ income (cumulative) would have been $ 550,000 higher if Cole had always used the percentage-of-completion method. The company is subject to a 35% tax rate. Prepare the journal entry to record the change in method.