Accounting 1 1

ADJUSTING ENTRIES
Throughout the accounting period, accounting information are recorded and
classified, and summarized in the form of financial statements at the end of the period to
meet the varied needs of users. Accounting data accumulated in the books serve as the
basis for preparation of these financial statements. To be able to present the results of
operations and the financial condition of the business fairly and accurately, the accounts
should reflect complete information. However, some accounts need to be examined and
adjusted for the following reasons;

1. Some income accounts already earned have not been recorded in the books.
2. Some expense accounts already incurred have not been recorded in the books.
3. Some income and expense accounts include portions that are still unearned or
unexpired.
4. Some liability accounts include portions already earned
5. Some asset accounts include portions already expired.

The last two items are examples of mixed accounts- or accounts consisting two
parts- income statement accounts and balance sheet accounts.

Adjusting entries are journal entries made at the end of the accounting period to
update the balances of some accounts in order to present more fairly and more accurately
the results of operations and financial condition of the business.

A business may employ one of the two methods of keeping the books of accounts;

1. Cash basis- income is recorded only when cash is received and expense is
recorded only when paid.
2. Accrual basis- income is recorded at the time goods or services are rendered,
whether or not cash is received, and expense is recorded when incurred, whether
cash is paid or not.

Different types of adjusting entries:

1. Adjusting entries to take up provisions for bad debts

Bad debts- losses from uncollectible accounts receivable.

Entry: Bad Debts Expense xx

Allowance for Bad Debts xx

Treatments:
Bad Debts Expense- Operating Expense
Allowance for Bad Debts- Contra- asset account /Valuation account
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Methods of estimating bad debts:

a. A certain percent of Accounts Receivable

Accounts Receivable xx
x Rate of loss %
Required Allowance xx
Less: Recorded Allowance xx
Bad Debts Expense xx

b. A certain percent of Service Income

Service Income xx
x Rate of loss %
Bad Debts Expense xx

Exercise 1 - The following accounts appear in the ledger of Diana Repair Shop before
adjustments were made on December 31, 2014;

Accounts Receivable P 150,000

Allowance for Bad Debts P 2,000
Service Income 600,000

Required: Compute the bad debts expense and give the corresponding entry for each
assumption below;

a. It is estimated that the allowance be increased by 1% of Service Income.

b. It is estimated that the allowance should be increased to 3% of accounts

receivable.

c. It is estimated that the allowance for bad debts is equal to 4% of outstanding

accounts receivable

d. It is estimated that ½ of 1 % of Service Income deemed uncollectible.

(2). Adjusting entry to take up provisions for depreciation

Depreciation- is the portion of the cost or other basic value of a tangible capital asset
allocated or charged as expense during an accounting period.
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Factors of depreciation:

In order to properly compute the amount of depreciation to be charged as expense

during an accounting period, three factors are necessary, namely:

a. Depreciation base-
b. Scrap value
c. Estimated useful life

The simplest and frequently used method of depreciation is called the straight line
method. The formula is;

Depreciation per year = Cost- Scrap Value

Estimated Life

Entry: Depreciation- Building xx

Accumulated Depreciation- Building xx

Treatments:
Depreciation- Operating Expense
Accumulated Depreciation- Contra-asset account/Valuation account

Exercise 2- For each case below, compute the depreciation expense for the year ending
December 31, 2014 and give the corresponding adjusting entry;

a. Furnitures costing P24,000 were acquired on October 1, 2012. It has an estimated

life of 5 years and a scrap value of P4,000
a. Solution:
24,000-4,000= 20,000/5 years= 4,000.
Depreciation 4,000
Accumulated Depreciation 4,000

b. A building was constructed on January 1, 2013 at a cost of P260,000 with an

estimated life of 20 years and a scrap value of P 20,000.
260,000-20,000= 240,000/20 years= 12,000
Depreciation 12,000
Accumulated Depreciation 12,000

c. Equipment costing P90,000 with an estimated life of 10 years and a scrap value of
P10,000 were acquired on October 1, 2014.
90,000-10,000= 80,000/10 years= 8,000
Depreciation 8,000
Accumulated Depreciation 8,000

(3). Prepayment of expenses

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Prepaid expense is an economic benefit that has been paid for in advance of its
use. At the time of payment, an asset is acquired that will expire or be used up and it
becomes an expense.

Two methods that can be used:

a. Asset method. Under this method, the original entry made is charged to an asset
account. At the end of the period, the expense portion is set up.

b. Expense method. Under this method, expense account is charged when payment
is made. At the end of the period, the asset portion is set up.

TRANSACTION ASSET METHOD EXPENSE METHOD

1. Payment of expense Prepaid Expense xx Expense xx
Cash xx Cash xx
Payment of expense. Payment of expense.

2. Adjusting entry. Expense xx Prepaid Expense

Prepaid Expense xx Expense
Expense for the period Prepaid expense.

Exercise 3-

a) For each of the following items indicate the Real amount and the Nominal amount on
December 31, 2014.
TRANSACTIONS Nominal Real
Fraction Amount Fraction Amount
June. 15 – Office supplies bought, P9,000. 3/4 of this
was consumed on Dec. 31.
Jul. 1 – Insurance premiums for two years paid,
P9,000.
Aug. 1 – Paid 6-month rent, P24,000.

Sept. 1- Paid two-year advertising, P3,600.

Dec. 1 - Paid a 4-month interest on notes payable,

P240.

b) Record the transactions in Exercise 3 by the Nominal Account Method.

c) Make the adjusting entries on December 31.
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Exercise 4- Alyssa Repair Shop had the following transactions, among other;
2014
Oct 1 - The business purchased a two-year fire insurance policy which took effect
today. The total premium paid amounted to P1,920. Use asset method.
Dec. 1 - Paid six months rent in advance totaling P6,000. Use expense method.

Required: For each of the above transactions, give entries to;

a) record the payment;
b) adjust the accounts on December 31, 2014.

Exercise 5- The following account balances were taken from the ledger of Lorraine
Advertising Agency on December 31, 2014 prior to adjustments;
Supplies on Hand P 1,800
Prepaid Advertising 2,400
Rent Expense 12,000
Interest Expense 180

An investigation on December 31, 2014 revealed the following additional

information;
a) Prepaid interest, P 80.
Prepaid interest 80
Interest expense 80

b) A physical count on December 31 showed that there are supplies used

amounting to P1,000.
Supplies Expense 1,000
Supplies on Hand 1,000

c) The business entered into a 4-month advertising contract on December 1,

2014 which required an advance payment of P2,400.
Advertising Expense 600
Prepaid Advertising 600

d) Rent expense, P 7,000.

Prepaid Rent 5,000
Rent expense 5,000

Required: Give the adjusting entries on December 31, 2014.

4. PRECOLLECTIONS OF INCOME

Precollected/Unearned/Deferred Incomes- are items representing some cash or property

received, the earnings or realization of which covers a period extending the current or
present period. These are also called deferred credits.
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Income collected in advance maybe recorded originally to a liability or real

account, or to an income or nominal account.

At the end of the accounting period, the precollected incomes are divided into
their component liability (real) and income(nominal) elements by means of adjusting
entries. In the adjusting process, the liability must be presented by a real account title
and the income portion by a nominal account title.

TRANSACTION Liability Method Income Method

a) Collection of income. Cash xx Cash xx
Liability Account xx Income Account xx
Cash receipts. Cash receipts.
b) Adjusting entry Liability Account xx Income Account xx
Income Account xx Liability Account xx
Income earned. Unearned income.

Exercise 6 – Determine the real portion and the nominal portion of the following
transactions.
2014
Dec. 1 – The owner of a building receives rental from a tenant , P 4,500, corresponding
to three months rent.
Dec. 16- Collected the interest of a 60-day, 12% note from a customer. The face value
of the note is P9,000.

Required: Record the transactions above using the nominal account method and give
the adjusting entries on December 31, 2014.
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Exercise 7 – The following account balances were taken from the ledger of Collette
Repair Shop on December 31, 2014 prior to adjustments;
Unearned Interest Income- liability P 480
Unearned Rent Income 4,000
Commission income 720
Repair Income 9,000

Data for adjustments;

a) Interest Income, P 120
Unearned Interest Income 120
Interest Income 120

b) Unearned Rent income, P1,800.

Unearned Rent income 2,200
Rent Income 2,200

c) The commission income is for three months starting December 1, 2014.

Commission Income 480
Unearned Commission Income 480

d) Of the repair income, 2/3 is unearned during the current year.

Repair Income 6,000
Unearned Repair Income 6,000

Exercise 8 – The following data were taken from the trial balance of Tan Dental Clinic
on December 31, 2014;
Accounts Receivable P 35,000
Allowance for Doubtful Accounts P 250
Medical Supplies Inventory 1,200
Prepaid Rent 2,400
Delivery Truck 39,000
Precollected Interest Income 60
Rent Income 600
Interest Expense 180
Insurance Expense 1,000

Data for adjustments;

a) It is estimated that 3% of the accounts receivable may not be collected.
b) The delivery truck was acquired on October 1, 2014 and estimated to be useful for 5
years.
c) 1/3 of the medical supplies are on hand on December 31.
d) The prepaid rent is for 4 months starting November 30, 2014.
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e) The interest expense is for 60 days starting November 28, 2014.

f) The rent income is for 3 months ending February 28, 2010.
g) The interest income is for 60 days, starting December 21, 2014.
h) The insurance expense represents premium payment on July 1, 2014 covering a 2-
year period.

Required: Adjusting entries on December 31, 2014.

ALYSSA REPAIR SHOP

Income Statement
For the Period Ended December 31, 2014

Service Income xxx

Interest income xxx
Total Revenues xxx
Less : Expenses
Salaries Expense xx
Rent Expense xx
Supplies Used xx
Doubtful Accounts xx
Depreciation- Building xx
Taxes xx
Interest Expense xx xxx
Profit before Income Tax xxx
Less: Income Tax xx
Profit (Loss) xxx
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ALYSSA REPAIR SHOP

Statement of Financial Position
As of December 31, 2014

ASSETS
Current Assets:
Cash xx
Notes Receivable
Accounts Receivable xx
Less: Allowance for Doubtful Accounts xx , xx
Accrued Income xx
Supplies on Hand xx
Prepaid Rent xx , xxx
Noncurrent Assets:
Land xx
Buildings xx
Less: Accumulated Depreciation xx , xx
Equipments xx
Less: Accumulated Depreciation xx , xx , xxx
Total Assets xxx

LIABILITIES AND CAPITAL

Current Liabilities:
Accounts payable xx
Notes payable xx
Accrued Taxes payable xx
Unearned interest Income xx , xxx
Noncurrent Liabilities:
Bonds Payable xx
Mortgage Payable xx , xxx
Total Liabilities xxx

Capital:
Alyssa, Capital xx
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Less: Alyssa, Drawing xx

Net Capital xx
Add(Less): Profit ( Loss ) xx , xxx
Total Liabilities & Capital xxx

Exercise 9 - The account debited or credited constituting one-half of an adjusting entry is

given in each of the numbered items below. In each case, give the account debited or
credited, as the case maybe, to complete the entry and state the purpose of each
adjustment.

1. Interest Receivable is debited.

2. Supplies on Hand is credited.

3. Taxes Payable is credited.

4. Unearned Interest is debited.

5. Rent Income is debited.

6. Insurance is credited.

7. Allowance for Doubtful Accounts is credited.

8. Depreciation Expense is debited.

9. Unearned Commission is credited.

10. Prepaid Advertising is debited.

Exercise 10. The following information were taken from the books and records of Allison
Shop on December 31, 2014, the end of the accounting period.

1. The Unexpired Insurance account had a debit balance of P24,000

representing premium for a one year insurance policy effective April 1 of the
current year.

2. A 60-day, 21% note dated December 21 was issued to Alex Store amounting to
P36,000. Interest will be paid at maturity.
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3. Commission Income account showed a credit balance of P24,000. Only one-

fourth of this amount had been earned during the current year.

4. On December 16, interest on a 60-day, 24% notes payable for P24,000 was paid
in advance. The note was dated December 16 and interest paid was debited to
Interest Expense.

5. On hand is a 45-day, 21% note receivable dated December 16 for P36,000. No

interest had been collected on this.

6. Salaries of employees of P12,000 due for the last week of December will be due
for payment on January 3 next year.

7. Unearned Rental Income was credited when P108,000 was received on November
1 representing six months rent collected in advance.

8. Office supplies costing P4,000 were purchased on November 15 and debited to

Supplies Expense. About P 2,500 worth of supplies are still on hand on December
31.

Required: Prepare the adjusting entries that caused the change in each account balance.
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Exercise 11- The trial balance of DIANA Laundromat at July 31, 2014, the end of the
current fiscal year, and the data needed to determine year-end adjustments are as
follows;

DIANA LAUNDROMAT
Trial Balance
July 31, 2014

Account Titles Debit Credit

Cash P 5,180
Laundry Supplies 3,850
Prepaid Insurance 1,200
Laundry Equipment 87,600
Accumulated Depreciation P 58,700
Accounts Payable 1,620
Diana, Capital 34,930
Diana, Drawing 10.600
Laundry Revenue 52,750
Wages Expense 17,900
Rent Expense 14,000
Utilities Expense 7,260
Miscellaneous Expense 410
Totals P148,000 P148,000

Adjustment data:
a. Inventory of laundry supplies at July 31………. P 240.
b. Insurance premiums expired during the year…… 360.
c. Depreciation on equipment during the year….. 6,400.
d. Wages accrued but not paid at July 31…………. 650.

Instructions:
1. Record the trial balance on a 10-column worksheet.
2. Complete the worksheet.
1. Prepare an income statement and a statement of financial position
2. Closing entries.
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3. Post-closing trial balance.

Exercise 12. A trial balance of Lorraine Storage at the end of its accounting period
appeared as follows;
LORRAINE STORAGE
Trial Balance
December 31, 2014

Account Tiles Debit Credit

Cash P 2,330
Accounts Receivable 970
Prepaid Insurance 1,450
Office Supplies 410
Office Equipment 2,500
Trucks 16,500
Accumulated Depreciation-Trucks P 1,500
Building 50,000
Land 20,000
Accounts Payable 1,050
Unearned Storage Fees 750
Mortgage Payable 13,500
Lorraine, Capital 57,720
Lorraine, Drawing 2,000
Storage Income 40,750
Office Salaries Expense 5,500
Truck Drivers’ Wages 10,600
Gas, Oil and Repairs 3,010
Total P115,270 P115,270

Adjustment data:
1. It is estimated that 10% of the accounts receivable is proven to be uncollectible.
2. An examination of insurance policies showed that P450 of insurance expired.
3. Actual count of office supplies showed a balance of P210.
4. Fixed assets are 10% depreciated annually.
5. Storage fees earned amounted to P250.
6. Accrued expenses: Office salaries, P2,000; truck drivers’ wages, P2,200.

Required:
1. A 10-column worksheet.
2. Income Statement.
3. Statement of Financial Position.
1. Closing Entries
2. Post-Closing Trial Balance
3. Reversing Entries
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