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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Since Goode Oil Company was formed in 2018, it has used the full-cost method for financial reporting and recorded all exploration costs in an asset account called Oil and Gas Properties. At the beginning of 2020, it changes to the successful-efforts method. Goode previously had reported pretax income of $2,200,000 and $2,000,000 in 2018 and 2019, respectively.

Analysis of the accounting records discloses that the company incurred the following exploration expenses based on the successful-efforts method:

Chapter 22, Problem 5P, Since Goode Oil Company was formed in 2018, it has used the full-cost method for financial reporting

In 2020, Goode reported pretax income of $3,100,000 under the successful-efforts method. The tax rate is 21%. Goode has a simple capital structure with 100,000 shares of common stock outstanding. It paid no dividends.

Required:

  1. 1. Prepare the journal entry to reflect the change in method at the beginning of 2020.
  2. 2. If the company also presents the 2018 and 2019 financial statements for comparative purposes, prepare the income statement disclosures (starting with income before income taxes) and retained earnings disclosures that are required in 2020.
  3. 3. What items (if any) would be restated on the financial statements?

1.

To determine

Journalize the cumulative effect of the retrospective adjustment of $1,330,000($550,000+$780,000), on Company GO’s prior year income that would be reported in 2020.

Explanation

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the cumulative effect of the retrospective adjustment of $1,330,000, on Company GO’s prior year income that would be reported in 2020.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
  Retained Earnings 1,050,700 
  Deferred Tax Liability 279,300 
   Oil and Gas Properties  1,330,000
  (Record the cumulative effect of income due to change from full-cost method to successful-efforts method)   

Table (1)

Description:

  • Retained Earnings is an equity account. Earnings decreased due to decrease in pretax income due to change from successful-efforts method to full-cost method, and a decrease in equity is debited.
  • Deferred Tax Liability is a liability account. The obligation to pay taxes has decreased on saved income taxes. The liability decreased and a decrease in liability is debited.
  • Oil and Gas Properties is an asset account. Since the cumulative difference has decreased due to change from full-cost method to successful-efforts method, oil and gas properties has decreased, and a decrease in asset is credited...

2.

To determine

Prepare comparative income statements and comparative statement of retained earnings of Company GO for the years 2018, 2019 and 2020.

3.

To determine

Indicate the items that would be restated on the financial statements.

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