CB Chap 3
CB Chap 3
CB Chap 3
The purpose of adjusting entries is to match costs against revenues. The expenses
incurred during the period, whether paid or not, are matched against the revenue
earned for the same period, whether collected or not, for the correct determination of
the profit for the period.
Depreciation
Depreciation is the decrease in value of a property due to usage, passage of time, action of
natural elements, or decay. As it is difficult to measure the actual decrease in value of the
property, the accounting of depreciation is done through a systematic basis. The cost of a
deprecible asset is systematically allocated over its estimated useful life. The estimated scrap
value at the end of the life of the asset is not included in the amount expensed over the periods
of depreciation.
The simplest method of depreciation is the straight-line method. Under this method, the
depreciation expense is calculated by allocating the depreciable amount equally over the
estimated useful life in years of the property. The formula for the computation of depreciation
using the straight line method is as follows:
Depreciable value
Depreciation Expense =
Estimated Useful Life
The depreciable value of the asset is the difference between its cost and estimated residual
value at the end of its useful life. The cost of the asset is the amount paid to purchase the asset,
including the incidental costs in bringing the asset to the location and condition intended for its
use. The residual value, sometime called scrap or salvage value, is the amount estimated to be
recovered at the end of the useful life of the property.
The estimated useful life is the estimated length of time, normally in years, when the property
is expected to be used.
Exercise 1.
A machine was purchased by the company for P120,000. It is expected to be sold as scrap for
P20,000 after its estimated useful life of 10 years. Present the journal entry to record the annual
depreciation.
Exercise 2.
A computer equipment was purchased for P65,000. The equipment will be sold for P5,000 after
its useful life of 5 years. Present the depreciation table for 5 years.
Exercise 3.
Compute the depreciation of the following properties and present the journal entry to record
the depreciation for one month:
P6,400,00
Building P100,000 20
0
Equipment 480,000 0 4
Uncollectible Accounts
a. Direct write-off
b. Allowance method
1. Percent of sales
2. Percent of receivables
3. Aging of accounts
Direct Write-Off
When an account is proven to be uncollectible and worthless, it is written-off. The write-off is
recorded by crediting the receivables and debiting an expense account, such as bad debts
expenses, uncollectible accounts expense, etc.
Allowance Method
The allowance method of recognizing uncollectible accounts expenses is recommended for the
better matching of costs against revenues. This method requires recording of the bad debts
expense if the accounts are doubtful of collection.
The “Allowance for Bad Debts” account is a deduction from the accounts receivable account.
Illustration:
Journal entries:
Direct Write-off Method:
2020
Sales P20,000
2021
Accounts
8,000
Receivable
Allowance Method:
2020
Sales P20,000
Exercises:
Exercise 4.
During its first year of operations, the company had sales of P6,000,000. Collection from
customers amounted to P4,000,000.
Required:
Prepare the adjusting journal entries to provide for doubtful accounts under the each of the
following independent assumptions:
Exercise 5:
At the beginning of the year, Outwork Everyone Company has an Accounts Receivable
of P3 million and an Allowance for Uncollectible Accounts of P120,000.
Accrued Expenses
Accrued expenses are expenses already incurred but not yet paid. These expenses create an
obligation to pay in the future.
Expens
xxx
e
Accounts Payable or
xxx
Accrued expense payable
Common examples of accrued expenses are salaries, utilities and interest expenses. Employee
services that have been rendered to the company but not yet paid are accrued salaries expenses.
Electricity, water and telephone services that have been consumed but not yet paid are also
accrued expenses.
Illustration:
The company borrowed P300,000 from a bank. It issued a 90-day 10% promissory note on
November 30, 2020.
2020
P300,00
Nov 30 Cash
0
Cash 307,500
Prepaid Expenses
Prepaid expenses are expenses already paid but not yet incurred. During the accounting period,
the portion that is already consumed is recorded as expense.
There are two methods in accounting prepaid expenses: the asset method and the expense
method.
Illustration:
On October 31, 2020, a company paid P120,000 as rent payment for 3 months.
Asset Method:
2020
Oct
Prepaid Rent P120,000
31
Cash P120,000
2021
Expense Method:
2020
Oct
Rent Expense P120,000
31
Cash P120,000
2021
Exercises:
Exercise 6:
Believe You Can Corporation has the following information during the month of December:
Total purchases for office supplies during the year amounted to P240,000. A year-end physical
count revealed that only 20,000 worth of supplies were on hand.
Fees for security services provided to the company, amounting to P45,000 per month, are
scheduled to be paid on the 5th day of the following month.
On December 31, the company received the following utility bills which were paid on the
following month:
Driven by the owner’s drive and focus, Icandoit Corporation started its operations on July 1 of
this year. As a protection, the company purchased an insurance plan for P60,000 per year. The
company paid the insurance premiums for 1 year at the start of its operations.
Prepare the journal entries relevant to the insurance. Use the asset method.
Exercise 8:
Driven by the owner’s motivation, Relentless Company started its operations on April 1 of this
year. He rented an office space for the company at P10,000 per month. The company paid its 12
months’ rent in advance at the start of its operations.
Prepare the journal entries relevant to the rent payment. Use the expense method.
Accrued Revenues
Accrued revenues are revenues already earned but not yet collected. These require recognition
of both the revenue and the receivable for the amount earned.
xx
Accounts Receivable
x
Sales or
Service Income or xxx
Accrued Revenue
Some examples are services already rendered to the client but have not yet been collected.
Illustration:
The company was hired to provide consultancy services for two months from December 16,
2020 to February 15, 2021. The service contract amount is P200,000 and will be paid at the end
of the contract.
2020
Dec
Accounts Receivable P50,000
31
2021
15 Cash 200,000
Unearned Revenues
Unearned revenues are revenues already collected but not yet earned. During the accounting
period, the portion that is already earned is recorded as income.
There are two methods in accounting deferred revenues: the liability method and the revenue
method.
Illustration:
The company was hired to provide consultancy services for two months from December 16,
2020 to February 15, 2021. The service contract amount is P200,000 and is paid on December
16, 2020.
Liability Method
2020
2021
Revenue Method
2020
Exercise 9:
Mr. Pasion owns Passionate Corporation providing grooming and beauty services to its clients.
One of his clients, International Bilibid Prison, pays a fixed monthly fee of P30,000. The fee is
paid 5 days after the end of the month.
Another client who was provided with beauty services in December, has an unrecorded unpaid
balance of P10,000.
Prepare the necessary journal entries to recognize the accrued revenues for the month of
December.
Exercise 10:
Starlink Networks provide internet and communication services to its clients. On October 1, one
of its clients paid P60,000 as a subscription for 6 months. The bookkeeper has recorded the
collection into the Unearned Subscription Revenue account.
Exercise 11:
Get Tough Company is providing training and coaching services to aspiring young professionals.
It collects services fees in advance as a policy to secure collections from clients. The monthly
service fee is P10,000 per client, and each client pays 3 months of service fees in advance. The
accountant books all the collections into the Service Revenue account.
During its first months of operations, it had the following number of clients:
October 30
November 40
December 50
Prepare the necessary adjusting entry on December 31. (Assume all of the collections were
made at the start of the month.)
After recording the adjusting journal entries, the Adjusted Trial Balance is prepared. It
will serve as the basis for the preparation of the financial statements.
Exercise:
Exercise 12:
Cod
Account Title Debit Credit
e
Additional information:
1. The computer is estimated to have a useful life of 5 years and no scrap value.
2. Unused supplies amounts to P7,000.
3. Unbilled service fees amount to P10,000.
4. The electricity bill received on February 1 amounts to P2,500.
Exercise 2
P65,00
1 P12,000 P12,000 P53,000
0
Exercise 3
Exercise 4
a.
Exercise 5
January:
February:
Exercise 6
Cash P60,000
Dec
Insurance Expense 30,000
31
Exercise 8
Cash 120,000
Rent
30,000
Expense
Exercise 9
Dec
Accounts Receivable 30,000
31
Exercise 10
Dec 31 Unearned Subscription Revenue 30,000
Exercise 11
Dec
Service Revenue 1,400,000
31
1. On December 30, 2020, your company performed P27,000 worth of service but did not
bill the client until January 5, 2021.
2. On November 1, 2020, your company purchased office supplies for P5,000 but did not
make an adjusting entry to reflect the P1,500 unused at December 31, 2020.
3. You did not record the MERALCO bill received on December 31, 2020 for P6,500. You
have scheduled the payment on January 6, 2021.
4. Your company purchased a new set of computer on August 1, 2020 for P30,000. The
computer has an estimated useful life of 5 years with no salvage value. No depreciation
was recorded on this equipment.
5. On October 1, 2020, your company agreed to work on a new project and is paid P50,000
in advance for 6 months contract starting December 1, 2020. Service Revenue was
credited when the advance payment was received.
6. Your company’s weekly five-day payroll is paid every Friday. But December 31, falls on a
Tuesday. The employees will not be paid until the following Friday. The weekly wages
amount to P25,000.
Requirement:
Assignment - ANSWERS
Adjusting journal entries on December 31:
State Finished
Question 1
Correct
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Question text
The purpose of adjusting entry is to
a.
Prove that total debits and total credits are equal
b.
c.
d.
Question 2
Correct
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Which is not one of the legal requirements of a business?
a.
b.
Withhold taxes on certain payments
c.
d.
Maintain profitability
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Your answer is correct.
Maintain profitability
Question 3
Correct
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Question text
The Accumulated Depreciation – Delivery Equipment is reported in the
a.
b.
c.
Balance Sheet as Deduction from the Delivery Equipment account
d.
Question 4
Correct
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Adjust DoIt Company reported the following unadjusted balances at year-end:
Debit Credit
The company estimates that 3% of the net credit sales would become uncollectible.
What amount should be reported as doubtful accounts expense for the current year?
a.
P240,000
b.
P224,000
c.
P160,000
d.
P225,000
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Your answer is correct.
P225,000
Question 5
Correct
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Which one of the following statements is correct?
Select one:
a.
b.
d.
The correct answer is: Assets and expenses normally have debit balances
Question 6
Correct
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The following are examples of manufacturing businesses, except
a.
b.
Sony Philippines
c.
Question 7
Correct
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In terms of debits and credits, which accounts have the same normal balances?
Select one:
a.
b.
c.
d.
The correct answer is: Account payable, Rental revenue, Unearned rental revenue
Question 8
Correct
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The recording phase of financial accounting covers the following except
Select one:
a.
b.
c.
d.
Question 9
Correct
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The adjusted trial balance shows
a.
b.
c.
d.
Question 10
Correct
Question text
Adjust DoIt Company reported the following unadjusted balances at year-end:
Debit Credit
The company estimates that 2% of the gross accounts receivable would become uncollectible.
What amount should be reported as doubtful accounts expense for the current year?
a.
P140,000
b.
P48,000
c.
P120,000
d.
P40,000
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Your answer is correct.
The correct answer is:
P48,000
Question 11
Correct
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Posting is the process of
Select one:
a.
b.
c.
d.
The correct answer is: Transferring entries from the general journal to the general ledger
Question 12
Correct
Mark 1.00 out of 1.00
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A prepaid expense is a/an
a.
Equity
b.
Revenue
c.
Expense
d.
Asset
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Asset
Question 13
Correct
Question text
Which is not a form of business organization?
a.
Partnership
b.
Business association
c.
Corporation
d.
Sole proprietorship
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Business association
Question 14
Correct
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An adjusting entry is erroneously recorded twice. Which of the following statements will
occur?
a.
b.
c.
d.
Question 15
Correct
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In the accounting process, which step follows journalizing?
a.
b.
c.
d.
Question 16
Incorrect
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Under the accrual basis of accounting, transactions and effects are recorded when
a.
c.
d.
Expenses are incurred but not paid and revenues are earned but not yet collected
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Question 17
Correct
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Failure to record the adjusting entry for the expired portion of prepaid expenses will
a.
b.
d.
Question 18
Correct
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An asset has been acquired for P250,000. It is estimated to have a useful life of 8 years,
and is being depreciated at P29,375 per year. How much is its estimated scrap value?
a.
P43,750
b.
P0
c.
P28,750
d.
P15,000
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Your answer is correct.
P15,000
Question 19
Correct
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What are the elements of a journal entry?
Select one:
a.
b.
c.
I, II and IV only
d.
Question 20
Incorrect
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Bookkeeping is
a.
the process of recording, classifying and summarizing business transactions for the
proper determination of correct tax declarations and payments.
b.
the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof.
c.
the person who keeps and maintains the books of accounts of the business
organization. The bookkeeper is responsible for recording the transactions of the
business.
d.