Question

Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta started a 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.

Answer 1