Booker Jones Case Summary

1.
A. If the cost of barrels were to be incorporated into the inventory account (balance sheet), then the cost of barrels used (Income statement) can be reduced.
From 1960-1961, Booker Jones increased its barrels produced from 43,000 barrels to 63,000 barrels. That is 20,000 barrel increased in just one year. The cost per barrels is $31.50.
(20,000 * 31.50= $630,000)
We can reduce the cost per barrel expense from income statement of $630,000.  (-407,000+630,000= 223,000) Therefore, pretax profit would have been $223,000 instead of net loss of $407,000.

B. If the change were made retroactively as of June 1, 1959 then
Effect on the balance sheet at the end of 1960
Number of barrel in inventory in 1960 is 172,000
(172,000 barrels * $31.50 = 5,418,000)
($5418000 + $4,506,000 = $9,924,000)
$9,924,000 is the new ending inventory in 1960
Deferring the Aging costs into the inventory balance would increase the Net Profit in 1960. This would then increase the Retained Earnings account on the balance sheet

Effect on the balance sheet at the end of 1961
Number of barrels in inventory in 1961 is 192,000
(192,000 barrels * $31.50 = $6,048,000)
$6,048,000 is the increased in inventory after incorporating the cost of barrels to inventory
($6,048,000 + $5,030,000 = $11,078,000)
$11,078,000 is the new ending inventory in 1960
Deferring the Aging costs into the inventory balance would increase the Net Profit in 1960. This would then increase the Retained Earnings account on the balance sheet

Effect on the income statement for