ADJUSTING ENTRIES
HOMEWORK EXERCISES AND PROBLEMS
A. EXERCISES
Section 1 WHY WE USE ACCRUALS, DEFERRALS AND OTHER ADJUSTMENTS
1. On October 1, 20X0, Espree Co. takes out a $10,000 loan and agrees to pay interest
twice each year for the life of the loan: $300 on April 1 and $300 on October 1. How
much interest expense will Espree report on its income statement for the year ended
December 31, 20X0, if:
a. it is on a cash basis?
b. it is on the accrual basis?
2. Near the end of 20X0, JNT Enterprises completes services for a customer and sends an
invoice for $500. As of JNT’s year end, no payment has been received. If JNT reports 20X0
revenue of $500, it must be using ____________ basis accounting.
3. On December 2, 20X1, P&T pays $1,000 to an exterminator for work that will start in
January. If P&T reports on its income statement $1,000 for exterminating expense for
20X1, it must be using __________ basis accounting.
4. For each of the following unrelated scenarios, show how much revenue is reported on
the income statement for 20X0 under the cash basis v. accrual basis.
Cash basis
Accrual basis
On November 1, 20X0, Alexi Inc. receives
$1,800 in rental payments for November,
December, and January ($600 per month).
MNM caters six lunches in December 20X0.
Each of the six customers is invoiced $100, but
as of December 31, 20X0, only one has paid.
A musician accepts $200 for 8 upcoming
weddings. As of December 31, 20X0, the
musician has performed at 2 of the 8.
5. For each of the following unrelated scenarios, show total expenses reported on the
income statement for 20X0 under the cash basis v. accrual basis.
Cash basis
Accrual basis
In December 20X0, ByCo runs ads costing
$30,000. ByCo receives the invoice but does
not pay it until January 20X1.
On December 1, 20X0, KPT pays $2,400 for
the next 12 months’ property insurance.
In December 20X0, Andre’s pays $400 to Pest
Control for 4 months’ service. The first
treatment will be in January 20X1.
© American Institute of Professional Bookkeepers, 2010
Homework Exercises and Problems
1
Mastering Adjusting Entries
Section 2 ACCRUED REVENUE
1. Select the term on the right that best completes the statement on the left. Terms may be
used once, more than once, or not at all.
Failing to make the entry to accrue revenue _____ net income.
The entry to record accrued revenue ____ assets.
Accrued revenue is revenue that is ____ but not collected
Failing to make the entry to accrue revenue _____ assets.
The entry to record accrued revenue _____ net income.
a. increases
b. decreases
c. overstates
d. understates
e. earned
f. unearned
2. Kurtz Rentals rents equipment to Ditka on February 1. Lease terms require Ditka to
make payments to Kurtz of $2,000 each quarter: April 30, July 31, October 31, and
January 31. Kurtz receives payments for April, July, and October.
a. What journal entry should Kurtz record on December 31?
b. If this entry is not recorded, how will it affect Kurtz’s financial statements?
3. Intell licenses technologies to a manufacturer. The agreement calls for Intell to receive
$3 for each unit manufactured with licensing fees remitted quarterly. As of December 31,
Intell has received the following payments:
Period
1/1 to 3/31
4/1 to 6/30
7/1 to 9/30
10/1 to 12/31
Units manufactured
475
350
525
600
Licensing fees
$1,425
$1,050
$1,575
$1,800
Intell has received checks for the first two quarters, but not the third; the fourthquarter check is not due until January.
a. If Intell is on the accrual basis, what adjusting entry should it record at year end to
recognize revenue earned from this manufacturer?
b. If this entry is not recorded, how will it affect Intell’s financial statements?
Homework Exercises and Problems
2
Mastering Adjusting Entries
4. Your firm holds a $15,000, 8% note receivable issued on August 1, 20X0. Interest is paid
once a year on July 31. On July 31, 20X6, you receive the normal interest payment.
a. What adjusting entry must you record December 31, 20X6?
c. If this entry is not recorded, how will it affect your company’s financial statements?
5. Your company, which has a fiscal year ending October 31, sells scented bars of soap for
a 12% commission. As of October 31, total sales are $400,000. Your company has
received $30,000, which you credited to Revenue.
a. How much additional revenue must you record for the fiscal year?
b. What is the journal entry to record the additional revenue?
Section 3 ACCRUED EXPENSES (ACCRUED LIABILITIES)
1. DillCo borrows $200,000 on September 1, 20X0, from First Bancorp. Monthly interest is
$1,200. The loan agreement requires DillCo to pay the interest every 6 months. The first
interest payment is due February 28, 20X1.
a. What adjusting entry must DillCo make on December 31, 20X0, to recognize the
accrued interest?
b. Explain the impact on the financial statements if this entry is not recorded.
2. Salary expense at QuickDinner Inc. is $7,500 per week for a Monday–Friday workweek.
Employees are paid each Friday.
a. If the company’s year ends on a Wednesday, what adjusting entry must it record?
b. Explain the impact on the financial statements if this entry is not recorded.
Homework Exercises and Problems
3
Mastering Adjusting Entries
3. Salary expense at SlowCooker is $6,000 per week for a Tuesday–Sunday workweek.
Employees are paid on Sunday.
a. If the company’s year ends on a Tuesday, what adjusting entry must it make?
b. Explain the impact on the financial statements if this entry is not recorded.
4. Rojo Equipment, which has an October 31 fiscal year, reports income of $200,000 for the
year ended 10/31/20X7. On October 31, Rojo discovers the following:

A $2,000 utility bill booked on October 30, 20X7, was not paid.

Rojo has a $10,000 note payable with a 12% annual interest rate. Payments are
due every six months. The last interest payment was made on June 30, 20X7.

Rojo’s has 4 salaried employees, each paid $800 a week for a Monday–Friday
workweek. Paychecks are distributed on Fridays. October 31 is a Thursday.
a. Prepare the adjusting entries required for the year ended October 31, 20X7.
b. What is Rojo’s net income for 20X7?
Homework Exercises and Problems
4
Mastering Adjusting Entries
Section 4  REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE)
1. At year end, Bijou records an adjusting entry for unearned revenue.
a. If the adjusting entry increases liabilities, what journal entry was recorded when the
cash was received?
b. If the adjusting entry increases revenues, show the journal entry that was recorded
when the cash was received.
2. WyCo’s fiscal year ends September 30. On September 10, it collects $30,000 for a painting
job and credits Unearned Painting Revenue. As of September 30, 60% of the work has
been done. What adjusting entry must WyCo record on September 30?
3. On August 1, InsureCo writes a 2-year policy for a total of $12,000 and receives the entire
payment in advance. If InsureCo credits Revenue, what adjusting entry must it record on
December 31?
4. On November 1 ATD enters a 1-year contract to provide security for CorpCo’s warehouses
for $12,000 a year and receives the first 3 months’ payment at signing.
a. If ATD books the payment as revenue, what adjusting entry must it record at year
end? How will its financial statements be misstated if the entry is not recorded?
c. If ATD books the payment as a liability, what adjusting entry must it record at year
end? How will its financial statements be misstated if the entry is not recorded?
5. The following table shows subscription revenue for three unrelated companies:
Beginning balance in Unearned Subscription Revenue
Payments received during the year
Ending balance in Unearned Subscription Revenue
Subscription revenue earned during the year
Homework Exercises and Problems
I
$ 2,400
40,000
?
39,000
Company
II
III
$ 3,000 $ 4,500
25,000
?
4,000
?
2,000
25,000
5
Mastering Adjusting Entries
a. Fill in the missing amounts.
b. Ignoring dollar amounts, what journal entries may have recorded the payments?
6. On February 1, Alta’s collects $60,000 for a job and credits Revenue. As of April 30, Alta’s
year end, 45% of the work is completed. What adjusting entry does Alta record on April 30?
Section 5—PREPAID (DEFERRED) EXPENSES
1. On December 1, 20X7, company pays an annual insurance premium of $3,600 that
covers December 1, 20X7, to November 30, 20X8.
a. Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded
in Prepaid Insurance.
b. Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded
in Insurance Expense.
2. GilCo pays $900 for office supplies in April and debits Office Supplies. On May 31,
GilCo’s year end, a physical count, finds $200 in supplies.
a. What is the adjusting entry?
b. If this entry is not recorded, how will it affect GilCo’s financial statements?
3. The following table shows the insurance premiums paid by three unrelated companies:
Beginning balance in Prepaid Insurance
Premiums paid during the year
Ending balance in Prepaid Insurance
Insurance used up during the year
I
$ 500
4,000
?
3,000
Case
II
$ 300
2,500
400
?
III
$4,500
?
200
5,500
a. Fill in the missing information.
b. Ignoring dollar amounts, give all possible journal entries to record the premium payments.
Homework Exercises and Problems
6
Mastering Adjusting Entries
4. On September 1, BarCo signs a 2-year rental agreement for a total of $6,000 which it pays
in advance.
a. If the prepayment was booked as prepaid rent, what is the year-end adjusting entry?
b. If the prepayment was booked as rent expense, what is the year-end adjusting entry?
5. In August, JemCo, which has an October 31 year end, pays $1,200 for office supplies and
records it in Supplies Expense. On October 31, a physical count reveals $440 of supplies
unused.
a. What adjusting entry must JemCo record on October 31?
b. If this entry is not recorded, how will it affect JemCo’s financial statements?
Section 6 OTHER END-OF-PERIOD ENTRIES
1. GoCo purchases a building for $350,000. If the building has an estimated life of 30
years and a residual value of $50,000, what is the adjusting entry in the year of
purchase?
2. For 20X9, PyCo has credit sales of $200,000. Based on past experience, PyCo
estimates that 3% of credit sales will be uncollectible. At year end, the balance in
Allowance for Doubtful Accounts is $4,000. What is the adjusting entry to record 20X9
bad debt expense?
3. At the end of 20X9, Spend Co has accounts receivable of $70,000, of which it estimates
10% will be bad debt. Allowance for Doubtful Accounts has a debit balance of $4,000.
a. What does the debit balance in Allowance for Doubtful Accounts imply about 20X8?
b. What is the 20X9 adjusting entry for bad debt?
c. What is the term for the difference between the closing balances in Accounts
Receivable and Allowance for Doubtful Accounts?
Homework Exercises and Problems
7
Mastering Adjusting Entries
4. Match the terms in the lefthand column below with the descriptions on the right.
1. Percentage of credit
sales method
2. Direct write-off method
3. Allowance method
4. Percentage of accounts
receivable method
a. Required to recognize bad debt under GAAP
b. Estimate of bad debt expense based on the age
of outstanding receivables
c. Estimate of bad debt based on credit sales
d. Required to recognize bad debt under tax law
5. Below are PruCo’s entries to two accounts for the year.
a. What do the debits to the Allowance account represent? Show the three journal
entries that led to the three debits in the Allowance account.
b. PruCo uses the percentage of credit sales method. If it estimates that 2% of its
$250,000 in credit sales will not be collected, what adjusting entry does PruCo record
to recognize bad debt expense for the year?
c. Now assume that Pruco uses the percentage of accounts receivable method. If it
estimates that $4,000 of its receivables will not be collectible, what adjusting entry
does PruCo record to recognize bad debt expense for the year?
Homework Exercises and Problems
8
Mastering Adjusting Entries
Section 7 FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS
1. For each account listed below, fill in the normal balance as “debit” or “credit.”
Account
Normal balance
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Equipment
Advertising Expense
Cash
Depreciation Expense—Automobiles
Depreciation Expense—Equipment
Equipment
Fees Earned
Interest Earned
Interest Expense
Interest Payable
Interest Receivable
B. Anders, Capital
B. Anders, Withdrawals
Land
Long-term Notes Payable
Notes Receivable
Office Supplies
Office Supplies Expense
Repairs Expense
Salaries Expense
Salaries Payable
Unearned Fees
Wages Expense
Homework Exercises and Problems
9
Mastering Adjusting Entries
2. Shown below, in alphabetical order, are the accounts of A-Plus, Inc. Use the worksheet
on the following page to set up a trial balance for the fiscal year ending June 30, 20X7.
Accounts Payable
Accumulated Depreciation—Building
Accumulated Depreciation—Equipment
$ 49,000
75,000
33,000
Building
110,000
Cash
155,000
Depreciation Expense—Building
4,000
Depreciation Expense—Equipment
5,000
Equipment
72,000
Insurance Expense
1,000
Interest Expense
1,100
Interest Payable
9,000
Land
Long-term Notes Payable
Postage Expense
Prepaid Insurance
Professional Fees
Property Taxes Payable
J. Crow, Capital
75,000
107,000
200
4,000
142,000
9,000
193,900
J. Crow, Withdrawals
49,000
Rent Expense
35,000
Rent Payable
3,400
Repairs Expense
18,900
Short-term Investments
27,000
Supplies
2,700
Supplies Expense
3,400
Telephone Expense
900
Unearned Professional Fees
500
Utilities Expense
1,300
Wage Expense
68,000
Wages Payable
11,700
Homework Exercises and Problems
10
Mastering Adjusting Entries
A-Plus, Inc.
Trial balance
June 30, 20X7
Debit
Homework Exercises and Problems
Credit
11
Mastering Adjusting Entries
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted trial
balance. Recommended: Focus on the adjustments and adjusted trial balance.
3. Below is the adjusted trial balance for Shady’s Illusions. Use this information to prepare
Shady’s income statement and balance sheet for the year.
No.
Account title
101
109
111
112
200
201
300
301
400
510
511
512
513
514
Cash
Office Supplies
Equipment
Accumulated Depreciation—Equipment
Accounts Payable
Wages Payable
S. Shady, Capital
S. Shady, Withdrawals
Entertainment Revenue
Rent Expense
Gas and Oil Expense
Wages Expense
Depreciation Expense—Equipment
Legal Expense
Totals
Homework Exercises and Problems
Debit
Credit
158,000
25,000
80,000
44,000
33,000
12,000
129,700
25,000
228,000
26,800
3,000
105,000
12,500
11,400
446,700
446,700
12
Mastering Adjusting Entries
Section 8 APPLYING YOUR KNOWLEDGE TO THE TRIAL BALANCE
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted trial
balance. Recommended: Focus on the adjustments and adjusted trial balance.
1. Using Thorne’s unadjusted trial balance below and facts ah, complete the following
worksheet by filling in the adjustments, adjusted trial balance and financial statements.
Thorne Construction
Unadjusted trial blance
For the year ended July 31, 20X8
Debit
Cash
12,500
Accounts Receivable
40,000
Allowance for Doubtful Accounts
Office Supplies
1,850
Prepaid insurance
6,500
Prepaid Rent
Equipment
154,000
Accum. Depreciation  Equipment
Accounts Payable
Interest Payable
Wages Payable
Long-term Notes Payable
W. Thorne, Capital
W. Thorne, Drawing
25,000
Constuction Revenues
Bad Debt Expense
Depreciation Expense–Equipment
Wage Expense
29,400
Interest Expense
900
Insurance Expense
Rent Expense
10,800
Office Supplies Expense
Repairs Expense
100
Utilities Expense
6,750
Totals
287,800
a.
b.
c.
d.
e.
f.
g.
h.
Credit
2,000
38,500
23,000
30,000
82,300
112,000
287,800
A physical count of office supplies as of July 31, 20X8,,shows $800 in supplies on hand.
On March 1, 20X7, Thorne Construction prepaid $9,000 for an 18-month insurance policy
of which 5 months ($2,500) was used up during fiscal year 20X7.
The equipment has a 28-year life and no salvage value. Thorne uses straight-line depreciation.
July’s eletric bill for $420 is not included because it arrived after the worksheet was prepared.
There are $1,800 of accrued wages as of the fiscal year end.
Thorne’s rent of $800 a month is payable quarterly, in advance. Its most recent payment
was $2,400O on June 30,, 20X8, to cover July, August and September 20X8.
Thorne estimates bad debt at 2% of credit sales.
The long-term note payable bears interest at 1% a month payable by the 10th of the
following month. The interest for July has neither been paid nor recorded.
Homework Exercises and Problems
13
Mastering Adjusting Entries
Cash
Accounts Receivable
Allow. for Doubtful Accts
Office Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accum. Depr.–Equip.
Accounts Payable
Interest Payable
Utilities Payable
Wages Payable
Long-term Notes Payable
W. Thorne, Capital
W. Thorne, Drawings
Constuction Revenues
Bad Debt Expense
Depr. Exp.–Equipment
Wage Expense
Interest Expense
Insurance Expense
Rent Expense
Office Supplies Expense
Repairs Expense
Utilities Expense
Totals
Unadjusted
trial balance
Dr
Cr
12,500
40,000
2,000
1,850
6,500
Thorne Construction Worksheet
July 31, 20X8
Adjusted
Adjustments
trial balance
Dr
Cr
Dr
Cr
154,000
38,500
23,000
30,000
82,300
25,000
112,000
29,400
900
10,800
100
6,750
287,800
Homework Exercises and Problems
287,800
14
Income
statement
Dr
Cr
Balance
sheet
Dr
Cr
Mastering Adjusting Entries
B. PROBLEMS FOR SECTIONS 1–8
1. Danza Inc. reported income of $440,000 for the year ended June 30, 20X8. However,
the records show that at year end, the following items had not been recorded:

On May 1, 20X8, Danza received a $12,000 advance for a six-month job
and credited Revenue for $12,000.

Interest on a $12,000 note payable bearing a 10% interest rate is paid
quarterly. The last payment was made at the end of May 20X8.

Danza’s payroll is 14 salaried employees, each earning $900 a week for a
5-day workweek. Friday is payday. June 30 was a Tuesday.
a. Prepare the adjusting entries necessary for the year ended June 30, 20X8.
b. What is Danza’s net income for 20X8?
2. Mikado Co. reported income of $224,000 for the year ended December 31, 20X9.
However, a review of the books shows the following items unaccounted for at
year end:

On August 1, 20X9, Mikado received a $27,000 advance for a 9-month job,
recording the payment in Unearned Revenue.

Interest on a $20,000 note payable with a 12% interest rate is paid every
3 months, the last interest payment having been at the end of June 20X9.

Mikado’s payroll is 7 salaried employees, each earning $1,000 a week for a
Monday–Friday workweek. Payday is Friday. December 31 was a Thursday.
a. Prepare the adjusting entries for the year ended June 30, 20X8.
b. What is Mikado’s net income for 20X9?
Homework Exercises and Problems
15
Mastering Adjusting Entries
3. You are handed the following unadjusted trial balance:
Champion Professional Services
Unadjusted trial balance
December 31, 20X7
Debit
Cash
Accounts receivable
25,000
-0-
Supplies
3,800
Prepaid insurance
9,800
Prepaid rent
Equipment
Credit
500
60,000
Accumulated depreciation—Equipment
22,900
Accounts payable
6,000
Salaries payable
-0-
Unearned Fees
4,000
F. Mercury, Capital
F. Mercury, Withdrawals
51,000
14,000
Fees Earned
Depreciation Expense—Equipment
Salaries Expense
Insurance Expense
Rent Expense
Supplies Expense
71,900
-024,800
-05,500
-0-
Advertising Expense
6,000
Utilities Expense
6,400
_______
155,800
155,800
Totals
Using the data below, complete the worksheet on the following page by filling in the
adjustments and adjusted trial balance for Champion for the year ended December 31, 20X7.
a. 8 employees are paid weekly. At year end, 3 days’ wages have accrued at $120
a day for each employee.
b. A physical count shows $600 of office supplies on hand at year end.
c. $2,600 of prepaid insurance coverage has expired.
d. Annual depreciation on the equipment is $8,450.
e. On November 1, Champion contracted for a new job for which it is paid $1,000 a
month. It received a 4-month advance and booked it as unearned fees.
f.
A client renewed its contract for 3 months at $1,300 a month, starting on
November 1. The first payment is due on February 28th.
g. The balance in Prepaid Rent is December’s rent.
Homework Exercises and Problems
16
Mastering Adjusting Entries
Champion Professional Services
Trial balance
December 31, 20X7
Unadjusted trial
balance
Adjustments
Dr
Cr
Dr
Cr
25,000
Cash
Accounts Receivable
-0-
Supplies
3,800
Prepaid Insurance
9,800
Prepaid Rent
Equipment
500
60,000
Acc. Depreciation—Equipment
22,900
Accounts Payable
6,000
Salaries Payable
-0-
Unearned Fees
4,000
F. Mercury, Capital
F. Mercury, Withdrawals
51,000
14,000
Fees Earned
Depreciation Exp.—Equipment
Salaries Expense
Insurance Expense
Rent Expense
Supplies Expense
71,900
-024,800
-05,500
-0-
Advertising Expense
6,000
Utilities Expense
6,400
Total
Adjusted trial
balance
Dr
Cr
155,800
Homework Exercises and Problems
155,800
17
Mastering Adjusting Entries
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted
trial balance. Recommended: Focus on the adjustments and adjusted trial balance.
4. Using the adjusted trial balance from Problem 3, complete the Income Statement
and Balance Sheet columns of the worksheet for Champion. When the worksheet
is complete, prepare Champion’s financial statements.
Champion Professional Services.Worksheet
December 31, 20X7
Adjusted trial
balance
Dr
Cr
Income
statement
Dr
Cr
Balance
sheet
Dr
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Acc. Depreciation–Equipment
Accounts Payable
Salaries Payable
Unearned Fees
F. Mercury, Capital
F. Mercury, Withdrawals
Fees Earned
Depreciation Expense–Equipment
Salaries Expense
Insurance Expense
Rent Expense
Supplies Expense
Advertising Expense
Utilities Expense
Homework Exercises and Problems
18
Cr
Mastering Adjusting Entries
5. Below are the 20X8 unadjusted and adjusted trial balances for Olympic
Consulting. Analyze the differences between the unadjusted and adjusted trial
balances, determine each adjustment that Olympic must have made at year end
and insert it in the Adjustments column. Label each adjustment “(a)”, “ (b),” etc.,
then put the same letter in the corresponding worksheet cell with a brief
explanation of the adjustment.
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Office Equipment
Accum. Depreciation—
Office Equipment
Accounts Payable
Salaries Payable
Utilities Payable
Unearned Consulting Fees
Texiera, Capital
Texiera, Withdrawals
Consulting Fees Earned
Depreciation Expense—
Office Equipment
Salaries Expense
Supplies Expense
Rent Expense
Utilities Expense
Total
Olympic Consulting
Trial balance
December 31, 20X8
Unadjusted
trial balance
Adjustments
Dr
Cr
Dr
Cr
2,500
10,000
4,000
1,800
15,900
Adjusted trial
balance
Dr
Cr
2,500
11,000
2,200
1,100
15,900
4,100
4,000
0
0
2,200
4,600
4,000
600
400
800
30,500
30,500
2,100
2,100
42,000
0
32,000
0
6,700
7,800
82,800 82,800
Homework Exercises and Problems
44,400
500
32,600
1,800
7,400
8,200
85,300
85,300
19