ACTIVITY- ADJUSTING ENTRIES
ACTIVITY 1: Compute the depreciation expense for the following independent cases. Use the straight line
method of depreciation. Show your solution
1. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that
the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If
the accounting period being reported by Pedro is one (1) year from January – December 2016, how much is
the depreciation expense?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10
Answer = PHP24,000
2. Pedro Reyes purchased a delivery vehicle on April 1, 2016 amounting to PHP250,000. It is estimated that
the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If
the accounting period being reported by Pedro is one (1) year from January-December 2016, how much is
the depreciation expense?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10
Annual Depreciation = PHP 24,000
3. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that
the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If
the accounting period being reported by Pedro is one (1) month (January 2016), how much is the
depreciation expense for the month?
Solution:
Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life
Annual Depreciation = (250,000 -10,000) / 10 = P24,000
Answer = PHP24,000 / 12 = PHP2,000 for January 2016
Exercise 3
For each of the following items, write the journal entry first (if one is needed) to record the transactions; and
then the adjusting entry, if any is
required, for the end of the accounting year of Ron Car Rental Company on December 31, 2016.
1. On December 1, borrowed PHP300,000 cash from Nation Bank by issuing a promissory note with an interest
of 12% per annum payable in three months.
Answer:
Journal Entry
Cash 300,000
Note Payable 300,000
Hint: when a promissory note is issued to support a borrowing, the note payable account is used.
Adjusting Entries
Interest Expense
3 000
Interest Payable (for Accrued Expense)
3 000
(300 000 x 12% x (1/12)
Hint: The formula to compute interest is Principal x Interest Rate x Time
In the above situation, the amount of interest to be accrued on December 31 is good for one month only
(covering Dec 1 to Dec 31, 2016)
2. On December 1, paid rental for six months beginning December 1, 2016 to May 31, 2017, at PHP3,000 per
month
Answer:
Journal Entry
Rent Expenses
18 000
Cash
18 000
Hint: The amount of advance rental paid was for six months (P3000/month x 6 months)
Adjusting Entries
Prepaid Expenses
Rent Expenses
15 000
15 000
Hint: the amount of prepaid expenses is the 5 month rental after December 31, 2016 (that is from
January 2017 to May 2017), thus P3,000 per month x 5 months is P15,000. The PHP15,000 becomes an
asset of the company as of December 31, 2016 but will be expensed the following accounting year.
3. On December 31, 2016, received telephone bills for the month December amounting to PHP5,600. The bill
will be paid on January 2017.
Answer
Adjusting Entries
Utilities Expense
5 600
Utilities Payable
5 600
ACTIVITY 2. On April 1, 2016, Mar Cruz, a lawyer, opened his own legal practice. The business adjusts and
closes its accounts at the end of each month. The following trial balance was prepared after one month of
operations. More information:
• No interest has yet been paid on the note payable. Accrued interest at April 30 amounts to PHP200.
• Salaries earned by the office staff but not yet recorded or paid amounted to PHP970 by April 30.
• Many clients are asked to make advance payment for legal services to be rendered in future months. These
advances are credited to the Unearned Service Revenue account once received. During April, PHP5,020 of
these advances were earned by the business.
Office supplies on hand by April 30 amounted to PHP400.
• The office equipment was purchased on April 1 and is being depreciated over an estimated useful life of 10
years with no residual value.
Unadjusted Trial balance
Debit
Credit
Cash
10,060
Account Receivables 0
Prepaid Expenses
7,800
Supplies
1,460
Office Equipment
Accumulated Dept..
–Office Equipment
Note Payable
Interest Payable
Unearned Service
Revenue
Cruz, Capital
Cruz, Withdrawal
Service Revenue
Supplies Expense
Salaries Expense
26,400
0
16,000
15,020
20,000
3,000
1,580
2,680
1,200
52,600
52,600
1. Prepare the adjusting entries for April 30.
2. Prepare a statement of income for April 2016.
3. Use Worksheet for your answer
Suggested solution:
General Journal
Date
Account Title and Explanation
Debit
Interest Expense
200
Accrued Expense (Interest Payable)
Salaries Expense
970
Salaries Payable
Unearned Service Revenue
5,020
Service Revenue
Supplies
400
Supplies Expense
Depreciation Expenses
220
Accumulated Depreciation – OE
ACTIVITY 3:
Credit
200
970
5,020
400
220
Kay Travel was organized on September 1, 2016. Assume that the accounts are closed and financial statements
are prepared each month. The company occupies rented office space but owns office equipment estimated to
have a useful life of 10 years from date of acquisition, September 1, 2016. The unadjusted trial balance for Kay
at November 30, 2016 is shown below:
Unadjusted Trial balance
Debit
Credit
Cash
1,750
Account Receivables 1,210
Office Equipment
4,800
Accumulated Dept..
80
–Office Equipment
Account Payable
1,640
Kay, Capital
Kay, Withdrawal
Service Revenue
Advertising Expense
Salaries Expense
Rent Expense
7,490
500
4,220
800
3,600
770
13,340
13,340
Additional Information:
The rent expense amounting to PHP770 covers rental for the month of November and December 2016
Instructions:
1. Prepare the adjusting entries necessary for the above problem
2. Prepare an adjusted trial balance
3. Prepare an income statement ending November 30, 2016
Solution:
Adjusting Entries:
General Journal
Date Account Title and Explanation
Debit Credit
Prepaid Expenses
385
Rental Expense
385
Depreciation Expense
40
Accumulated Deprn – Office Eqpt 40
Problem 1. Evergreen Laundry carried out the following transactions during May. Which of these
transactions represented expenses in May? Explain.
1. Paid an attorney PHP500 for legal services rendered in April.
Answer: This is an April expense because it was incurred in April although payment was made in May.
2. The owner withdrew PHP1,600 from the business for personal use.
Answer: Not an expense. This should be recorded as a withdrawal made by the owner. Owner’s withdrawals
are considered
separate from the transactions of the business. The learner may use the business entity principle as reason.
3. Purchased a copying machine for PHP25,000 cash. The machine has a useful life of 25 months.
Answer: Part of the cost of the machine is an expense for May (depreciation) of PHP25,000/25 months which is
PHP1,000 per
month. The machine will benefit more than one accounting period.
4. Paid PHP450 gasoline for the delivery truck used in business during May.
Answer: This is a May expense incurred during the month.
5. Paid salaries of employees for time worked during May - PHP3,000.
Answer: An expense of May incurred during the month