Question

Instructions

Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta started business in 2014 and prepared the following income statements:

Question not attempted.

DELTA OIL COMPANY

Income Statements

For the Years Ended December 31, 2014 - 2015

1		2014	2015
2	Revenue	$1,000,000.00	$3,000,000.00
3	Other expenses	400,000.00	1,300,000.00
4	Exploration expenses	120,000.00	238,000.00
5	Income before income taxes	$480,000.00	$1,462,000.00
6	Income tax expense (30%)	144,000.00	438,600.00
7	Net income	$336,000.00	$1,023,400.00
8	Earnings per share	$3.36	$10.23

The company chose to change to the full-cost method at the beginning of 2016. Under the full-cost method, Delta capitalizes all exploration costs of the Oil and Gas Properties asset account on its balance sheet. It determines the exploration and amortization expense amounts under the full-cost method to be as follows:

	2014	2015	2016
Exploration expense	$0	$0	$0
Amortization expense	8,000	18,200	42,000

In addition, Delta reported revenue of $9,000,000 and other expenses of $4,200,000 in 2016. With the 2016 financial statements, the company issues comparative statements for the previous 2 years.

Required:

1.	Prepare the journal entry to reflect the change.
2.	Prepare the comparative income statements and the comparative statements of retained earnings for 2016, 2015, and 2014. Notes to the financial statements are not necessary.
3.	Next Level Discuss the advantages and disadvantages of accounting for a change in this manner.

Answer 1

Comparitive Income Statement
		2014		2015
	Revenue'	1000000		3000000
	Other expense	400000		1300000
	Exploration expense	120000		238000
	Income before Income Tax	480000		1462000
	Income Tax expense @ 30%	144000		438600
	Net Income	336000		1023400
	Earning per share	3.36		10.23
	Revised Comparitive Income Statement for 2014 ,2015 & 2016
		2014		2015		2016
	Revenue'	1000000		3000000		9000000
	Other expense	400000		1300000		4200000
	Amortisation expense	8000		18200		42000
	Exploration Expense	-		-
	Income before Income Tax	592000		1681800		4758000
	Income Tax expense @ 30%	177600		504540		1427400
	Net Income	414400		1177260		3330600
	Comparitive Statement for Retained Earning 2014 ,2015 & 2016
		2014		2015		2016
	income as as per Existing accounting system	336000		1023400		-
	Income as per Revised system to capitalize exploration cost	414400		1177260		3330600
	Net Increase or decrease in Retained Earning	-78400		-153860		3330600
			-232260
	In the Books of Delta Oil Journal entry for adjustment
S. No	Journal Entry		Debit		Credit
1	P& L A/c   ( Amoritisation cost for 2014: 8000, 2015:18200)		26200
	To Amortisation Expense				26200
2	Adjustment for Exploration Cost		358000
	(2014-$120000, 2015 - $ 238000
	To P&L A/c				358000
3	proporties Asset A/c		358000
	Capitalisation of Exploration cost for 2014	120000
	Capitalisation of Exploration cost for 2014	238000
	Adjustment for Exploration Cost				358000
4	P&L A/c ( Adjustment for additional tax liability)		99540
	Adjustment for incremental Tax Expense				99540
	2014: (177600-144000)
	2015:(504540-438600
5	Retained Earning A/c		232260
	P& L A/C ( For adjustment for Profit & Loss for Previous year 2014 and 2015 from Retained Earning