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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta started business in 2017 and prepared the following income statements:

Chapter 22, Problem 7E, Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta , example  1

The company chooses to change to the full-cost method at the beginning of 2019. 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:

Chapter 22, Problem 7E, Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta , example  2

In addition, Delta reported revenue of $9,000,000 and other expenses of $4,200,000 in 2019. With the 2019 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 2019, 2018, and 2017. Notes to the financial statements are not necessary.

3. Next Level Discuss the advantages and disadvantages of accounting for a change in this manner.

1.

To determine

Journalize the cumulative effect of the retrospective adjustment of $358,000 ($120,000+$238,000) increase in income, on Company DO’s prior year income that would be reported in 2019.

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 $358,000 increase in income, on Company DO’s prior year income that would be reported in 2019.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
  Oil and Gas Properties 331,800 
   Deferred Tax Liability  69,678
   Retained Earnings  262,122
  (Record the cumulative effect of income due to change from successful-efforts method to full-cost method)   

Table (1)

Description:

  • Inventory is an asset account. Since the cumulative difference has increased due to change from successful-efforts method to full-cost method, oil and gas properties has increased, and an increase in asset is debited.
  • Deferred Tax Liability is a liability account. The obligation to pay taxes has increased on saved income taxes, due to increase in cumulative difference...

2.

To determine

Prepare comparative income statements and comparative stamen of retained earnings of Company DO for the years 2017, 2018 and 2019.

3.

To determine

Explain the advantages and disadvantages of recording this type of reporting method.

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