Change in Accounting Method

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:

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.

Chart of Accounts

CHART OF ACCOUNTS

Delta Oil Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
154	Deferred Tax Asset
172	Oil and Gas Properties
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
260	Deferred Tax Liability

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
542	Amortization Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Amount Descriptions

Amount Descriptions
Adjustment for the cumulative effect of accounting method change
Balance at beginning of year, as previously reported
Balance at beginning of year, as adjusted
Balance at end of year
Income before income taxes
Net income
Other expenses
Revenue

General Journal

Prepare the journal entry to reflect the change on January 1, 2016

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Income Statements

Prepare the comparative income statements for 2016, 2015, and 2014. Notes to the financial statements are not necessary. Additional Instructions

DELTA OIL COMPANY

Comparative Income Statements

For the Years Ended December 31, 2014 - 2016

1		2016	2015 As Adjusted	2014 As Adjusted
2
3
4
5
6
7
8	Earnings per share (100,000 shares)

Retained Earnings

Prepare the comparative statements of retained earnings for 2016, 2015, and 2014. Notes to the financial statements are not necessary. Additional Instructions

DELTA OIL COMPANY

Comparative Statements of Retained Earnings

For the Years Ended December 31, 2014 - 2016

1		2016	2015	2014
2
3
4
5
6

Next Level

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

Advantages and disadvantages of the retrospective adjustment method include:

I.	A risk of loss of public confidence due to changing previously reported information
II.	Comparability
III.	Costs may outweigh benefits
IV.	Faithful representation of financial information