CB Chap 3

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 39

Purpose of Adjusting Entries

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.

Adjusting entries are recorded at the end of an accounting period.

Most common transactions requiring adjusting entries:

1. Depreciation of property, plant and equipment


2. Allowance for uncollectible accounts
3. Accrued and prepaid expenses
4. Accrued and unearned revenues
5. Other adjustments, like
o Unused or unsold Inventory at the end of 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.

Exercises: Using the Straight-Line Method of Depreciation

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:

Asset Cost Salvage Value Useful Life (yrs)

P6,400,00
Building P100,000 20
0

Machinery 1,500,000 60,000 10

Equipment 480,000 0 4
Uncollectible Accounts

Methods of accounting for bad debts:

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.

The proforma entry to record the write-off is as follows:

Bad Debts Expense xxx


Accounts Receivable xxx

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 proforma entry to record the recognition of bad debts is as follows:

Bad Debts Expense xxx


Allowance for Bad Debts xxx

The “Allowance for Bad Debts” account is a deduction from the accounts receivable account.
Illustration:

Jun 30, 2020 Sold on account to a customer merchandise for P20,000.


Sep 30, 2020 The customer paid P12,000.
Nov 30, 2020 The account balance is considered doubtful of collection.
Jan 31, 2021 The account balance is proved to be uncollectible.

Journal entries:
Direct Write-off Method:

2020

Jun 30 Accounts Receivable P20,000

Sales P20,000

Sep 30 Cash 12,000

Accounts Receivable 12,000

(No entry on Nov 30)

2021

Jan 31 Bad Debts Expense 8,000

Accounts
8,000
Receivable

Allowance Method:

2020

Jun 30 Accounts Receivable P20,000

Sales P20,000

Sep 30 Cash 12,000

Accounts Receivable 12,000

Nov 30 Bad Debts Expense 8,000

Allowance for Bad Debts 8,000


2021

Jan 31 Allowance for Bad Debts 8,000

Accounts Receivable 8,000

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:

a. The company believes one percent of sales may prove uncollectible.


b. The company policy is to maintain an allowance for doubtful accounts equal to 10% of
the outstanding accounts receivable

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.

During January, it sold goods to customers amounting to P300,000 and collected


P200,000. A receivable accounting amounting to P50,000 has proven to be uncollectible
and was written off.

During February, it sold goods to customers amounting to P900,000 and collected


P300,000. A receivable previously written off amounting to P5,000 has been collected.

The company estimates that 2% of Accounts Receivable is uncollectible.


Required:
Prepare the adjusting entries for January and February.

Accrued and Prepaid Expenses

Accrued Expenses
Accrued expenses are expenses already incurred but not yet paid. These expenses create an
obligation to pay in the future.

The proforma entry to record an accrued expense is as follows:

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.

Journal entries related to the promissory note are as follows:

2020

P300,00
Nov 30 Cash
0

Notes Payable P300,000


Dec 31 Interest Expense 2,500

Interest Payable 2,500

Jan 31 Interest Expense 2,500

Interest Payable 2,500

Feb 28 Interest Expense 2,500

Interest Payable 2,500

Notes Payable 300,000

Interest Payable 7,500

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.

The entries related to the rent payment are as follows:

Asset Method:

2020
Oct
Prepaid Rent P120,000
31

Cash P120,000

To record the payment of rent for 3 months.

Nov 30 Rent Expense 40,000

Prepaid Rent 40,000

To record the expiration of the rent for 1 month.

Dec 31 Rent Expense 40,000

Prepaid Rent 40,000

To record the expiration of the rent for 1 month.

2021

Jan 31 Rent Expense 40,000

Prepaid Rent 40,000

To record the expiration of the rent for 1 month.

Expense Method:

2020

Oct
Rent Expense P120,000
31

Cash P120,000

To record the payment of rent for 3 months.

Dec 31 Prepaid Rent 40,000


Rent Expense 40,000

To record the unexpired portion of rent.

2021

Jan 31 Rent Expense 40,000

Prepaid Rent 40,000

To record the expiration of the rent for 1 month.

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:

Liwanag Electric Company, P40,000;


DoonDito Telecom, P20,000
Clear Water District P5,000

Prepare the necessary adjusting journal entries.


Exercise 7:

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 and Unearned Revenues

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.

The proforma entry to record an accrued revenue is as follows:

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.

The journal entries relevant to the contract are as follows:

2020

Dec
Accounts Receivable P50,000
31

Service Revenue P50,000

2021

Jan 31 Accounts Receivable 100,000

Service Revenue 100,000

Feb 15 Accounts Receivable 50,000

Service Revenue 50,000

15 Cash 200,000

Accounts Receivable 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

Dec 16 Cash P200,000

Unearned Service Revenue P200,000

31 Unearned Service Revenue 50,000

Service Revenue 50,000

2021

Jan 31 Unearned Service Revenue 100,000

Service Revenue 100,000

Feb 15 Unearned Service Revenue 50,000

Service Revenue 50,000

Revenue Method

2020

Dec 16 Cash P200,000

Service Revenue P200,000

31 Service Revenue 150,000

Unearned Service Revenue 150,000


Exercises

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.

Prepare the necessary adjusting entries.

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.)

Adjusted Trial Balance

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:

PACIOLI GENERAL SERVICES


Unadjusted Trial Balance
As of January 31, 2021

Cod
Account Title Debit Credit
e

101 Cash P76,000

111 Accounts Receivable 12,000

121 Supplies 8,000

151 Equipment 30,000

201 Accounts Payable P8,000

301 Pacioli, Capital 100,000

311 Pacioli, Drawing 10,000

401 Service Revenue 40,000

601 Salaries 12,000

TOTAL P148,000 P148,000

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.

Prepare the Adjusted Trial Balance.

Answers to Exercise Problems


Exercise 1

Depreciation Expenses P10,000

Accumulated Depreciation - Machinery P10,000

Exercise 2

Yea Depreciatio Accumulated Net Book


Cost
r n Depreciation Value

P65,00
1 P12,000 P12,000 P53,000
0

2 65,000 12,000 24,000 41,000

3 65,000 12,000 36,000 29,000

4 65,000 12,000 48,000 17,000

5 65,000 12,000 60,000 5,000

Exercise 3

Depreciation Expenses P48,250

Accumulated Depreciation P48,250

Exercise 4

a.

Doubtful Accounts Expense 60,000

Allowance for Doubtful Accounts 60,000


b.

Doubtful Accounts Expense 200,000

Allowance for Doubtful Accounts 200,000

Exercise 5

January:

Allowance for Uncollectible Accounts 9,000

Uncollectible Accounts Expense 9,000

February:

Uncollectible Accounts Expense 7,000

Allowance for Uncollectible Accounts 7,000

Exercise 6

Office Supplies Expense 220,000

Office Supplies Inventory 220,000

Security Services Expense 45,000

Accrued Security Services


45,000
Expense

Electricity Expenses 40,000

Telecommunication Expenses 20,000

Water Expenses 5,000

Accrued Utility Expenses 65,000


Exercise 7

July 1 Prepaid Insurance P60,000

Cash P60,000

Dec
Insurance Expense 30,000
31

Prepaid Insurance 30,000

Exercise 8

Apr 1 Rent Expense 120,000

Cash 120,000

Dec 31 Prepaid Rent 30,000

Rent
30,000
Expense

Exercise 9

Dec
Accounts Receivable 30,000
31

Accrued Service Income 30,000

Accounts Receivable 10,000

Accrued Service Income 10,000

Exercise 10
Dec 31 Unearned Subscription Revenue 30,000

Advances from Customers/Unearned


30,000
Revenues

Exercise 11

Dec
Service Revenue 1,400,000
31

Advances from Customers/Unearned Service Revenue 1,400,000

Exercise 12 – nasa video ang solution and sagot

Assignment. Adjusting Entries


Your company is closing its books on December 31, 2020. Analyze the following items
and prepare the necessary adjusting journal entries:

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:

Prepare the necessary adjusting entries.

Assignment - ANSWERS
Adjusting journal entries on December 31:

1 Accounts Receivable P27,000

Accrued Service Revenue P27,000

[If Asset method was used]


2

Office Supplies Expense 3,500

Office Supplies 3,500

[Or if Expense method was used]

Office Supplies 1,500

Office Supplies Expense 1,500

3 Electricity/Utility Expenses 6,500

Accounts/Utilities Payable 6,500

4 Depreciation Expense 2,500

Accumulated Depreciation - Office Equipment 2,500

5 Service Revenue 41,667

Unearned Revenue/Advances from Customers 41,667

6 Salaries and Wages 10,000

Accrued Salaries Payable 10,000


Started on Tuesday, 15 November 2022, 12:19 PM

State Finished

Completed on Tuesday, 15 November 2022, 12:37 PM

Time taken 17 mins 26 secs

Grade 18.00 out of 20.00 (90%)

Question 1
Correct

Mark 1.00 out of 1.00

Flag question

Question text
The purpose of adjusting entry is to

a.
Prove that total debits and total credits are equal

b.

Facilitate the preparation of financial statements

c.

Detect and correct an erroneous recording of transactions

d.

Properly match the expenses and revenues


Feedback
Your answer is correct.

The correct answer is:

Properly match the expenses and revenues

Question 2
Correct

Mark 1.00 out of 1.00

Flag question

Question text
Which is not one of the legal requirements of a business?

a.

File and pay taxes

b.
Withhold taxes on certain payments

c.

Pay business permits and licenses

d.

Maintain profitability
Feedback
Your answer is correct.

The correct answer is:

Maintain profitability

Question 3
Correct

Mark 1.00 out of 1.00

Flag question

Question text
The Accumulated Depreciation – Delivery Equipment is reported in the

a.

Income Statement as part of the Operating Expenses

b.

Balance Sheet as Addition to the Delivery Equipment account

c.
Balance Sheet as Deduction from the Delivery Equipment account

d.

Trial Balance only


Feedback
Your answer is correct.

The correct answer is:

Balance Sheet as Deduction from the Delivery Equipment account

Question 4
Correct

Mark 1.00 out of 1.00

Flag question

Question text
Adjust DoIt Company reported the following unadjusted balances at year-end:
Debit Credit

Accounts Receivable P8,000,000

Allowance for doubtful accounts 16,000

Net credit sales 7,500,000

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
Feedback
Your answer is correct.

The correct answer is:

P225,000

Question 5
Correct

Mark 1.00 out of 1.00

Flag question

Question text
Which one of the following statements is correct?
Select one:

a.

Liabilities and revenues normally have debit balances

b.

Assets and revenues normally have credit balances


c.

Assets and expenses normally have debit balances

d.

Assets and liabilities normally have credit balances


Feedback
Your answer is correct.

The correct answer is: Assets and expenses normally have debit balances

Question 6
Correct

Mark 1.00 out of 1.00

Flag question

Question text
The following are examples of manufacturing businesses, except

a.

Rolex Watch Repair Shop

b.

Sony Philippines

c.

Red Ribbon Bakeshop


d.

Toyota Motors, Inc.


Feedback
Your answer is correct.

The correct answer is:

Rolex Watch Repair Shop

Question 7
Correct

Mark 1.00 out of 1.00

Flag question

Question text
In terms of debits and credits, which accounts have the same normal balances?
Select one:

a.

Accounts receivable, Accounts payable, Capital

b.

Rental expense, Professional fees, Drawing

c.

Prepaid expenses, Insurance expense, Capital

d.

Account payable, Rental revenue, Unearned rental revenue


Feedback
Your answer is correct.

The correct answer is: Account payable, Rental revenue, Unearned rental revenue

Question 8
Correct

Mark 1.00 out of 1.00

Flag question

Question text
The recording phase of financial accounting covers the following except
Select one:

a.

Financial statements are prepared

b.

Source documents are gathered and analyzed

c.

Transactions are recorded in the journal

d.

Posting to the ledger


Feedback
Your answer is correct.

The correct answer is: Financial statements are prepared

Question 9
Correct

Mark 1.00 out of 1.00

Flag question

Question text
The adjusted trial balance shows

a.

Accounts and amounts which have been adjusted only

b.

Accounts and amounts for the preparation of financial statements

c.

Revenues and expenses accounts only

d.

Assets, liabilities and equity accounts only


Feedback
Your answer is correct.

The correct answer is:

Accounts and amounts for the preparation of financial statements

Question 10
Correct

Mark 1.00 out of 1.00


Flag question

Question text
Adjust DoIt Company reported the following unadjusted balances at year-end:
Debit Credit

Accounts Receivable P3,000,000

Allowance for doubtful accounts 12,000

Net credit sales 7,000,000

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
Feedback
Your answer is correct.
The correct answer is:

P48,000

Question 11
Correct

Mark 1.00 out of 1.00

Flag question

Question text
Posting is the process of
Select one:

a.

Reconciling entries from the general journal to the general ledger

b.

Reconciling entries from the general ledger to the general journal

c.

Transferring entries from the general journal to the general ledger

d.

Transferring entries from the general ledger to the general journal


Feedback
Your answer is correct.

The correct answer is: Transferring entries from the general journal to the general ledger

Question 12
Correct
Mark 1.00 out of 1.00

Flag question

Question text
A prepaid expense is a/an

a.

Equity

b.

Revenue

c.

Expense

d.

Asset
Feedback
Your answer is correct.

The correct answer is:

Asset

Question 13
Correct

Mark 1.00 out of 1.00


Flag question

Question text
Which is not a form of business organization?

a.

Partnership

b.

Business association

c.

Corporation

d.

Sole proprietorship
Feedback
Your answer is correct.

The correct answer is:

Business association

Question 14
Correct

Mark 1.00 out of 1.00

Flag question
Question text
An adjusting entry is erroneously recorded twice. Which of the following statements will
occur?

a.

Expenses will be understated

b.

Equity will be overstated

c.

Assets will be overstated

d.

Net income will be understated


Feedback
Your answer is correct.

The correct answer is:

Net income will be understated

Question 15
Correct

Mark 1.00 out of 1.00

Flag question

Question text
In the accounting process, which step follows journalizing?
a.

Documentation of the transaction

b.

Posting to the ledger

c.

Preparation of trial balance

d.

Preparation of financial statements


Feedback
Your answer is correct.

The correct answer is:

Posting to the ledger

Question 16
Incorrect

Mark 0.00 out of 1.00

Flag question

Question text
Under the accrual basis of accounting, transactions and effects are recorded when

a.

Expenses are paid and revenues are earned


b.

Expenses are incurred and revenues are collected in cash

c.

Expenses are incurred and revenues are earned

d.

Expenses are incurred but not paid and revenues are earned but not yet collected
Feedback
Your answer is incorrect.

The correct answer is:

Expenses are incurred and revenues are earned

Question 17
Correct

Mark 1.00 out of 1.00

Flag question

Question text
Failure to record the adjusting entry for the expired portion of prepaid expenses will

a.

Understate equity and overstate liability

b.

Understate assets and net income


c.

Overstate equity and understate liability

d.

Overstate assets and net income


Feedback
Your answer is correct.

The correct answer is:

Overstate assets and net income

Question 18
Correct

Mark 1.00 out of 1.00

Flag question

Question text
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
Feedback
Your answer is correct.

The correct answer is:

P15,000

Question 19
Correct

Mark 1.00 out of 1.00

Flag question

Question text
What are the elements of a journal entry?

I. The date of the transaction


II. The accounts debited and credited
III. The monetary values of the accounts debited and credited
IV. The posting reference code of the destination ledger account
V. A brief and clear explanation of the transaction

Select one:

a.

I, II and III only

b.

I, II, III and IV only

c.

I, II and IV only
d.

I, II, III, IV and V


Feedback
Your answer is correct.

The correct answer is: I, II, III, IV and V

Question 20
Incorrect

Mark 0.00 out of 1.00

Flag question

Question text
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.

the recording of financial transactions and is part of the process of accounting in


business.
Feedback
Your answer is incorrect.

The correct answer is:

the recording of financial transactions and is part of the process of accounting in


business.

You might also like