MASTERING ADJUSTING ENTRIES
HOMEWORK EXERCISES AND PROBLEMS
Section 1 WHY WE USE ACCRUALS, DEFERRALS AND OTHER ADJUSTMENTS
1. 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.
Section 2 ACCRUED REVENUE
2. 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
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
Homework
Units Manufactured
475
350
525
600
Licensing Fees
$1,425
$1,050
$1,575
$1,800
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Mastering Adjusting Entries
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?
Section 3 ACCRUED EXPENSES (ACCRUED LIABILITIES)
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 received 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 Rojo’s net income for 20X7?
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Mastering Adjusting Entries
Section 4 REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE)
5. 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.
6. 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?
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Mastering Adjusting Entries
Section 5—PREPAID (DEFERRED) EXPENSES
7. On September 1, BarCo signs a 2-year rental agreement paying $6,000 rent 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?
8. 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
9. Match the terms in the lefthand column below with the descriptions on the right.
1. Percentage of credit
sales method
a. Required to recognize bad debt under GAAP
2. Direct write-off method
b. Estimate of bad debt expense based on the age
of outstanding receivables
3. Allowance method
c. Estimate of bad debt based on credit sales
4. Percentage of accounts
receivable method
d. Required to recognize bad debt under tax law
1.
2.
Homework
3.
4.
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Mastering Adjusting Entries
10. 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 collectable, what adjusting entry does
PruCo record to recognize bad debt expense for the year?
Homework
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Mastering Adjusting Entries
Section 7 FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS
11. 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
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Mastering Adjusting Entries
Section 8 APPLYING YOUR KNOWLEDGE TO THE TRIAL BALANCE
12. 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 balance
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
Credit
2,000
38,500
23,000
30,000
82,300
112,000
287,800
a.
A physical count of office supplies as of July 31, 20X8 shows $800 in supplies on hand.
b.
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.
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Mastering Adjusting Entries
c.
The equipment has a 28-year life and no salvage value. Thorne uses straight-line depreciation.
d.
July’s eletric bill for $420 is not included because it arrived after the worksheet was prepared.
e.
There are $1,800 of accrued wages as of the fiscal year end.
f.
Thorne’s rent of $800 a month is payable quarterly, in advance. Its most recent payment
was $2,400 on June 30, 20X8 to cover July, August, and September 20X8.
g.
Thorne estimates bad debt at 2% of credit sales.
h.
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
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Unadjusted
trial balance
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
Thorne, Capital
Thorne, Drawings
Constuction Revenues
Bad Debt Expense
Depr. Exp.– Equipment
Wage Expense
Interest Expense
Insurance Expense
Rent Expense
Supplies Expense
Repairs Expense
Utilities Expense
Totals
Dr
12,500
40,000
Cr
Thorne Construction Worksheet
July 31, 20X8
Adjusted
Adjustments
trial balance
Dr
Cr
Dr
Cr
2,000
1,850
6,500
154,000
38,500
23,000
30,000
82,300
25,000
112,000
29,400
900
10,800
100
6,750
287,800
287,800
Net Income
Homework
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Income
statement
Dr
Cr
Balance
sheet
Dr
Cr