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Chapter 8
Adjusting Entries
PROBLEM 1: TRUE OR FALSE
1. FALSE – at the end of the period when financial statements
are prepared
2. FALSE
3. TRUE
4. TRUE
5. FALSE – “to accrue” means to recognize an income that is
already earned but not yet collected, or an expense that is
already incurred but not yet paid
6. FALSE - ₱200
7. TRUE
8. TRUE
9. FALSE – expense method
10. TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. Advertising expense
200,000
Advertising payable
200,000
2. Interest receivable (180K x 10% x 2/12)
Interest income
3,000
3,000
3. Depreciation expense [(420K ÷ 8) x 1/12]
Accumulated depreciation
4,375
4. Bad debts expense
Allowance for bad debts
4,375
45,000
45,000
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5. Solutions:
Requirement (a):
Liability method
Income method
May 1, 20x1
May 1, 20x1
Cash
480,000
Unearned rent
480,000
Cash
480,000
Rent income
480,000
to record the receipt of 1-year rent
in advance
to record the receipt of 1-year
rent in advance
Requirement (b):
Liability method
Dec. 31, 20x1
Unearned rent
Rent income
Income method
Dec. 31, 20x1
320,000
320,000
to recognize the earned portion of
the 1-year rent in advance
Rent income
160,000
Unearned rent
160,000
to recognize the unearned
portion of the 1-year rent in advance
* (480,000 x 8/12) = 320,000
** (480,000 x 4/12) = 160,000
6. Solutions:
Requirement (a):
Asset method
Expense method
Aug. 1, 20x1
Aug. 1, 20x1
Prepaid insurance 360,000
Cash
360,000
Insurance expense 360,000
Cash
360,000
to record the prepayment of
1-year insurance
to record the prepayment of
1-year insurance
Requirement (b):
Asset method
Expense method
Dec. 31, 20x1
Dec. 31, 20x1
Insurance expense 150,000
Prepaid insurance 150,000
Prepaid insurance 210,000
Insurance expense 210,000
to recognize the expired portion
of the 1-year insurance
to recognize the unexpired
portion of the 1-year insurance
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* (360,000 x 5/12) = 150,000
** (360,000 x 7/12) = 210,000
PROBLEM 3: ADJUSTING ENTRIES
1. Interest expense (300K x 14% x 9/12)
Interest payable
31,500
31,500
2. Utilities expense
Utilities payable
32,000
3. Rent expense
Rent payable
22,000
4. Rent receivable (4K x 2 mos.)
Rent income
5. Bad debts expense (400K x 5%)
Allowance for bad debts
32,000
22,000
8,000
8,000
20,000
20,000
6. Depreciation expense [(15M ÷ 20) x 8/12]
Accumulated depreciation
7. Solutions:
Requirement (a):
Liability method
500,000
500,000
Income method
Nov. 1, 20x1
Nov. 1, 20x1
Cash
720,000
Unearned income
720,000
Cash
720,000
Royalty income
to record the receipt of advanced
royalty income
to record the receipt of advanced
royalty income
720,000
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Requirement (b):
Liability method
Income method
Dec. 31, 20x1
Dec. 31, 20x1
Unearned income 560,000
Royalty income
560,000
Royalty income 160,000
Unearned income
160,000
to recognize the earned portion of
the advanced royalty
to recognize the unearned
portion of the advanced royalty
* 560,000 earned portion (given)
** (720,000 – 560,000) = 160,000 unearned portion
8. Solutions:
Requirement (a):
Asset method
Expense method
Oct. 31, 20x1
Oct. 31, 20x1
Prepaid insurance 360,000
Cash
360,000
Insurance expense 360,000
Cash
360,000
to record the prepayment of
1-year insurance
to record the prepayment of
1-year insurance
Requirement (b):
Asset method
Expense method
Dec. 31, 20x1
Dec. 31, 20x1
Insurance expense 60,000
Prepaid insurance 60,000
Prepaid insurance 300,000
Insurance expense 300,000
to recognize the expired portion
of the 1-year insurance
to recognize the unexpired
portion of the 1-year insurance
* (360,000 x 2/12) = 60,000
** (360,000 x 10/12) = 300,000
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PROBLEM 4: ADJUSTING ENTRIES
1.
Interest receivable (400K x 14% x 7/12)
Interest income
32,666.67
32,666.67
2.
Salaries expense
Salaries payable
46,000
46,000
3.
Utilities expense
Utilities payable
16,000
4.
Rent expense
Rent payable
240,000
16,000
240,000
5.
Depreciation expense
110,000
Accumulated depreciation
110,000
*(360,000 ÷ 3 yrs.) x 11/12 = 110,000
6.
Bad debts expense
30,000
Allowance for bad debts
7. Solutions:
Requirement (a):
Liability method
30,000
Income method
June 1, 20x1
June 1, 20x1
Cash
360,000
Unearned rent
360,000
Cash
360,000
Rent income
360,000
to record the receipt of 1-year rent
in advance
to record the receipt of 1-year
rent in advance
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Requirement (b):
Liability method
Dec. 31, 20x1
Unearned rent
Rent income
Income method
Dec. 31, 20x1
210,000
210,000
to recognize the earned portion of
the 1-year rent in advance
Rent income
150,000
Unearned rent
150,000
to recognize the unearned
portion of the 1-year rent in advance
* (360,000 x 7/12) = 210,000
** (360,000 x 5/12) = 150,000
8. Solutions:
Requirement (a):
Asset method
Expense method
Sept. 1, 20x1
Sept. 1, 20x1
Prepaid insurance 360,000
Cash
360,000
Insurance expense 360,000
Cash
360,000
to record the prepayment of
1-year insurance
to record the prepayment of
1-year insurance
Requirement (b):
Asset method
Expense method
Dec. 31, 20x1
Dec. 31, 20x1
Insurance expense 120,000
Prepaid insurance 120,000
Prepaid insurance 240,000
Insurance expense 240,000
to recognize the expired portion
of the 1-year insurance
to recognize the unexpired
portion of the 1-year insurance
* (360,000 x 4/12) = 120,000
** (360,000 x 8/12) = 240,000
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PROBLEM 5: ADJUSTING ENTRIES
1.
Salaries expense [25 employees x (₱600 x 2) x 3 days] 90,000
Salaries payable
90,000
2.
Interest receivable (1M x 10% x 5/12)
Interest income
41,666.67
41,666.67
3.
Interest expense (350K x 12% x 8/12)
Interest payable
28,000
4.
Utilities expense
Utilities payable
13,000
28,000
13,000
5.
Depreciation expense [(1.6M ÷ 5 yrs.) x 9/12] 240,000
Accumulated depreciation
240,000
6.
Supplies expense (34,000 – 8,000)
Prepaid supplies
26,000
26,000
7.
Prepaid supplies
Supplies expense
8,000
8.
Bad debt expense (340,000 x 3%)
Allowance for bad debts
10,200
8,000
10,200
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PROBLEM 6: MULTIPLE CHOICE
1. C
2. D
3. C
4. C
5. C
6. D
7. D
8. A
9. D
10. C
Explanation:
 Accounts receivable – bad debt expense may need to be
accrued.
 Prepaid supplies – a portion of this may have been ‘used-up’
and needs to be recognized as expense.
 Equipment – depreciation may need to be recognized.
 Unearned rent income – a portion may have been earned and
needs to be recognized as income.
 Notes payable – interest expense may need to be accrued
PROBLEM 7: MULTIPLE CHOICE
1. B
Solution:
Unadjusted total expenses
i. Accrual of salaries expense
ii. Depreciation (100K ÷ 10 yrs.)
iii. Bad debts (120K x 5%)
Adjusted total expenses
239,000
22,000
10,000
6,000
277,000
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2. A
Solution:
Unadjusted total income
450,000
ii. Recognition of rent income (90K x 1/3)
iv. Accrual of interest income (500K x 12% x 3/12)
30,000
15,000
495,000
Adjusted total income
Unadjusted total expenses
i. Accrual of utilities expense
iii. Recognition of insurance expense
280,000
20,000
12,000
Adjusted total expenses
312,000
Adjusted total income
Adjusted total expenses
495,000
(312,000)
Adjusted profit (loss)
183,000
3. D
4. A
Solutions:
Initial recording
Liability method
Income method
Dec. 1, 20x1
Dec. 1, 20x1
Cash
300,000
Unearned income
300,000
Cash
300,000
Service fee
to record the receipt of 3months advance
fees
to record the receipt of 3months advance
fees
Adjusting entries
Liability method
300,000
Income method
Dec. 31, 20x1
Dec. 31, 20x1
Unearned income 100,000
Service fee
100,000
Service fee
200,000
Unearned income 200,000
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to recognize the earned portion of the
advance fees
to recognize the unearned portion of the
advance fees
5. D - See solution above.
6. B
Solutions:
Initial recording:
Asset method
Expense method
Sept. 1, 20x1
Sept. 1, 20x1
Prepaid insurance 240,000
Cash
240,000
Insurance expense 240,000
Cash
240,000
to record the prepayment of 1-year
insurance
to record the prepayment of 1-year
insurance
Adjusting entries:
Asset method
Expense method
Dec. 31, 20x1
Dec. 31, 20x1
Insurance expense 80,000
Prepaid insurance
80,000
Prepaid insurance 160,000
Insurance expense 160,000
to recognize the expired portion of the
1-year insurance
to recognize the unexpired portion of
the 1-year insurance
7. D
8. A
Solution:
Accounts receivable
Allowance for bad debts (280K x 3%)
Carrying amount
9. C
Solution:
280,000
(8,400)
271,600
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Equipment
Accumulated depreciation [144K + (360K ÷ 5 yrs.)]
Carrying amount
360,000
(216,000)
144,000
10. B
Solution:
Unadjusted profit
i. Interest expense (300K x 16% x 5/12)
ii. Unearned rent (90K x 2/3)
iii. Unused supplies (60K x 1/4)
iv. Unearned service fees (40K x 1/2)
360,000
(20,000)
(60,000)
15,000
(20,000)
Adjusted profit (loss)
275,000
Explanations:
i. Interest expense is deducted because expense reduces profit.
ii. The unadjusted profit includes rent income of ₱90,000.
However, only 1/3 of this amount is earned. Accordingly, 2/3
is removed.
iii. The unadjusted profit includes supplies expense of ₱60,000.
However, ¼ of this amount is unused. Accordingly, the ¼
unused is removed by adding it back to profit so that the
adjusted profit reflects only the ¾ used.
iv. The unadjusted profit includes service fees of ₱40,000.
However, ½ of this amount is unearned. Accordingly, the
unearned amount is removed.