Concept explainers
1.
Journalize the cumulative effect of the retrospective adjustment of $1,330,000
1.
Explanation of Solution
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 $1,330,000, on Company GO’s prior year income that would be reported in 2017.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
Retained Earnings | 931,000 | |||||
399,100 | ||||||
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.
Working Notes:
Compute retained earnings amount.
Compute the deferred tax liability amount.
2.
Prepare comparative income statements and comparative statement of retained earnings of Company GO for the years 2015, 2016 and 2017.
2.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations, and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare comparative income statements of Company GO for the years 2015, 2016 and 2017.
Company GO | |||
Comparative Income Statements (Partial) | |||
2017 |
2016 (As Adjusted) |
2015 (As Adjusted) | |
Income before income taxes | $3,100,000 | $1,220,000 | $1,650,000 |
Income tax expense | (930,000) | (366,000) | (495,000) |
Net income | $2,170,000 | $854,000 | $1,155,000 |
Earnings per share: | |||
Net income | $21.70 | $8.54 | $11.55 |
Table (2)
Working Notes:
Compute income before income taxes for 2016.
Compute income before income taxes for 2015.
Compute the income tax expense for 2017.
Compute the income tax expense for 2016.
Compute the income tax expense for 2015.
Compute the earnings per share (EPS) for 2017.
Compute the earnings per share (EPS) for 2016.
Compute the earnings per share (EPS) for 2015.
Statement of retained earnings: This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends is deducted from beginning retained earnings to arrive at the end result, ending retained earnings.
Prepare comparative statement of retained earnings of Company GO for the years 2017, 2016, and 2015.
Company GO | |||
Comparative Statement of Retained Earnings | |||
2017 | 2016 | 2015 | |
Beginning unadjusted retained earnings | $2,940,000 | $1,540,000 | $0 |
Less: Adjustment for the cumulative effect on prior years of retrospectively applying the average cost inventory method (net of taxes) | (931,000) | (385,000) | 0 |
Adjusted retained earnings | 2,009,000 | 1,155,000 | 0 |
Net income | 2,170,000 | 854,000 | 1,155,000 |
Ending retained earnings | $4,179,000 | $2,009,000 | $1,155,000 |
Table (3)
Working Notes:
Compute beginning unadjusted retained earnings for 2017.
Compute beginning unadjusted retained earnings for 2016.
Compute the adjustment value for 2017.
Compute the adjustment value for 2016.
3.
Indicate the items that would be restated on the financial statements.
3.
Explanation of Solution
The following items would be restatedon the financial statements:
- Exploration expenses would be restated on the 2015 and 2016 income statements indicating the change from full-cost method to successful-efforts method.
- Oil and Gas Properties,
Deferred Tax Liability, and Retained Earnings would be restated on the 2015 and 2016 balance sheets.
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