Question

Instructions Since Goode Oil Company was formed in 2015, 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 2017, it changes to the successful-efforts method. Goode previously had reported pretax income of $2,031,000 and $2,261,000 in 2015 and 2016, respectively. Analysis of the accounting records discloses that the company incurred the following exploration expenses based on the successful-efforts method: 2015 2016 Exploration expenses $556,500 $797,000 In 2017, Goode reported pretax income of S3,003,000 under the successful-efforts method. The tax rate is 30%. Goode has a simple capital structure with 100,000 shares of common stock outstanding. It paid no dividends. Required 1. Prepare the journal entry to reflect the change in method at the beginning of 2017. 2. If the company also presents the 2015 and 2016 financial statements for comparative purposes, prepare the income statement disclosures (starting with income before income taxes) and retained earnings disclosures that are required in 2017. 3. What items (if any) would be restated on the financial statements?

Answer 1

Solution:

1	Journal entry
		Dr	Cr
	Retained earnings	947450
	Exploration asset		947450
		2015	2016
	Exploration expenes	556500	797000
	Less: Tax credit	166950	239100
	Total	389550	557900	947450	impact on retained earnings
2	Income statement
		2015	2016	2017
	Profit before tax	2031000	2261000
	Less: exploration expenes	556500	797000
	Profit before tax after adjustments	1474500	1464000	3003000
	Tax @ 305	442350	439200	900900
	PAT	1032150	1024800	2102100
	EPS	10.3215	10.248	21.021
3	Items to be restated
	a) Expenses
	b) Tax
	c) Assets
	d) Retained earnings
	Retained earnings
		2015	2016	2017
	Opening balance	0	1032150	2056950
	PAT	1032150	1024800	2102100
	Closing balance	1032150	2056950	4159050