Cullen Construction Company, which began operations in 2025, changed from the cost-recovery to the percentage-of-completion method of accounting for long-term construction contracts during 2026. For tax purposes, the company employs the cost-recovery method and will continue this approach in the future. The appropriate information related to this change is as follows.

Instructions

a. Assuming that the tax rate is 20%, what is the amount of net income that would be reported in 2026?

b. What entry(entries) are necessary to adjust the accounting records for the change in accounting principle?

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2025 2026 Pretax Income from Percentage-of-Completion $880,000 900,000 Cost-Recovery $590,000 480,000 Difference $290,000 420,000