Delta Oil Company uses the successfulefforts method to accou

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: 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.

Solution

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 232260