Adjusting Process s
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Handout – Adjusting Process
1. Types of Adjustments
a. Deferrals (Prepayments) ❖ Accrued expenses
❖ Prepaid expenses (Asset or Expense) ❖ Accrued income
❖ Unearned income (Liability or Revenue) c. Depreciation
b. Accruals d. Doubtful accounts
2. Deferrals (Prepayments)
a. Prepaid Expenses [Asset Method]
(1) Supplies
X’s Print Shop purchased advertising supplies costing P50,000 on October 5. X’s Print Shop debited the asset Supplies.
This account shows a balance of P50,000 in the October 31 trial balance. An inventory count at the close of business
on October 31 reveals that P20,000 of supplies are still on hand.
Questions:
a. What was the initial entry of X’s Print Shop on (c.2) October profit
October 5 related to purchase of Supplies? (c.3) October 31 assets
b. How much supplies were used during October? (c.4) October 31 owner’s equity
c. Without any adjustments, what would the effect on d. What should be the adjusting entry of X’s Print
the following items in the financial statements Shop by October 31 to reflect the consumption of
(overstated, understated or correctly stated): supplies?
(c.1) October expenses
(2) Insurance
On July 4, Y Piggery paid P48,000 for a one-year fire insurance policy, beginning immediately. Y debited the cost of
the premium to a real account at that time. This account still shows a balance of P48,000 in the July 31 trial balance.
Questions:
a. What was the initial entry of Y on July 4 for the (c.1) July expenses
payment of premium to the policy provider? (c.2) July profit
b. How much premium expired during July? (c.3) July 31 assets
c. Without any adjustments, what would the effect on (c.4) July 31 owner’s equity
the following items in the financial statements d. What should be the adjusting entry of Y by July 31
(overstated, understated or correctly stated): to reflect the use of the premium?
(3) Rent
On March 1, 2015, Z Fashion Boutique paid P240,000 for a 24-month rent in advance for the use of a stall in a flea
market. Z recorded the amount paid in a permanent account. On December 31, 2015 trial balance, the permanent
account still shows P240,000 balance related to the rent paid last March 1.
Questions:
a. What was the initial entry of Z Fashion Boutique (c.1) 2015 expenses
Concepts on March 1 related to the advance (c.2) 2015 profit
payment made to stall owners? (c.3) December 31 assets
b. How much rent payments were consumed during (c.4) December 31 owner’s equity
the year? d. What should be the adjusting entry of Z Fashion
c. Without any adjustments, what would the effect on Boutique by December 31 to reflect the rent
the following items in the financial statements payments consumed?
(overstated, understated or correctly stated):
b. Unearned Income [Liability Method]
(1) Case 1
On April 1, W Solutions, a consulting business, received P1,000,000 advance payments from its clients for services to
be performed in the future. W Solutions recorded the same in the liability account ‘Unearned Fees.’ By the end of April,
W Solutions fulfilled 40% of the required work based on the contract with its clients. On April 30 trial balance, the
liability account Unearned Fees still show P1,000,000 balance. Based on W Solutions’ Chart of Accounts, the business
uses Fees Earned to record revenues.
Questions:
a. What was the initial entry of W Solutions on April 1 (c.1) April revenues
upon receipt of advance payments from its clients? (c.2) April profit
b. How much fees were earned during April? (c.3) December 31 liabilities
c. Without any adjustments, what would the effect on (c.4) December 31 owner’s equity
the following items in the financial statements d. What should be the adjusting entry of W Solutions
(overstated, understated or correctly stated): by April 30 to reflect the fees already earned?
(2) Case 2
On December 1, LR Advertising Concepts received P120,000 payments in advance for advertising a local product in
one of the billboards it owns for six months starting December 1. On December 31, trial balance, LR Advertising
Concepts shows the following partial trial balance:
LR Advertising Concepts
Trial Balance
FND ACT1 | H – 04 | 1 of 5
Adjusting Process s
December
Account Account Title (Dr.) (Cr.)
No.
101 Cash P 348,000
… … …
… … …
110 Land 1,048,000
111 Billboard fixtures 453,000
201 Accounts payable P45,000
202 Unearned advertising
revenues 120,000
207 Loans payable 440,000
… … …
… … …
301 LR, Capital 623,000
… … …
401 Advertising revenue 0
501 Salaries expense 36,000
… … … __________
Total P4,879,000 P4,879,000
Questions:
a. What was the initial entry of LR Advertising (c.1) December revenues
Concepts on December 1 related to the receipt of (c.2) December profit
advance payments from its customers? (c.3) December 31 liabilities
b. How much advertising revenues were earned (c.4) December 31 owner’s equity
during December? d. What should be the adjusting entry of LR.
c. Without any adjustments, what would the effect on Advertising Concepts by December 31 to reflect the
the following items in the financial statements advertising revenues already earned?
(overstated, understated or correctly stated):
3. Accruals
a. Accrued expenses
(1) Utilities
By the end of January, XX Publishing House received a bill from Meralco amounting to P19,100. According to the bill,
the amount is based on entity’s consumption of power during January and shall be due 10 days after January 31. XX
Publishing House has not yet recorded any expense related to its power consumption prior to the receipt of the bill.
Questions:
a. What was the initial entry of XX Publishing House (c.2) January profit
in January related to its consumption of power from (c.3) January 31 liabilities
Meralco? (c.4) January 31 owner’s equity
b. How much utilities expense was incurred during d. What should be the adjusting entry of XX
January? Publishing House by January 31 to reflect the
c. Without any adjustments, what would the effect on expenses already incurred?
the following items in the financial statements e. What would be the journal entry of XX Publishing
(overstated, understated or correctly stated): House upon payment of utilities on February 10?
(c.1) January expenses
(2) Interest expense (case 1)
On May 30, 2015, 3A Car Dealer borrowed P2 million pesos from BDO UniBank for use in business expansion. The loan
is due in three (3) years on May 30, 2018 and requires annual payment of interest at an annual rate of 12% every
May 30 starting May 30, 2016. 3A Car Dealer follows calendar year reporting.
Questions:
a. What was the initial entry of 3A Car Dealer on May (c.2) 2015 profit
30, 2015 related to the interest? (c.3) December 31 liabilities
b. How much interest expense was incurred during (c.4) December 31 owner’s equity
2015? d. What should be the adjusting entry of 3A Car
c. Without any adjustments, what would the effect on Dealer on December 31, 2015 to reflect the interest
the following items in the financial statements expense already incurred?
(overstated, understated or correctly stated): e. What would be the journal entry of 3A Car Dealer
(c.1) 2015 expenses upon payment of interest on May 30, 2016?
(3) Interest expense (case 2)
On December 1, 2015, Coco Consulting signed a three-month note payable in the amount of P1,000,000 from EastWest
Bank for use in business expansion. The note requires interest at an annual rate of 12. Both principal and interest is
payable at maturity.
Questions:
a. How much interest expense was incurred by Coco d. Assuming the rate is stated monthly instead of
Consulting during 2015? annually, what would be the answers in letters (a)
b. What should be the adjusting entry of Coco and (b) above?
Consulting on December 31, 2015 to reflect the e. Assuming the rate is silent as to the period
interest expense already incurred? covered, what would be the answers in letters (a)
c. What would be the journal entry of Coco and (b) above?
Consulting upon payment of the note payable on
February 28, 2016?
(4) Salaries and wages (case 1)
HO – 04 | 2 of 5
Adjusting Process s
Leo Farm has 3 workers with daily rate of P2,000. Leo Farm has a 5-day workweek and pays its workers every Tuesday
of the week. In August 2015, the last Tuesday pay day fell on 25th and Leo Farm prepared its financial statements on
August 31 which is a Monday.
Questions:
a. How much wages expense should be accrued by (c.2) August profit
Leo Farm on August 31, 2015 assuming the (c.3) August 31 liabilities
workers worked on schedule until August 31? (c.4) August 31 owner’s equity
b. Without any adjustments, what would the effect on c. What should be the adjusting entry of Leo Farm by
the following items in the financial statements August 31 to reflect the expenses already incurred?
(overstated, understated or correctly stated): d. What would be the journal entry of Leo Farm upon
(c.1) August expenses payment of wages on September 1?
(5) Salaries and wages (case 2)
RNB Laundry Solutions pays its staff on a bi-weekly basis on a 5-day workweek. Recurring bi-weekly salaries
of the staff amount to P6,500. RNB Laundry Solutions prepared its financial statements on July 31, 2015.
Remaining workdays in July since the last pay day are July 29, 30 and 31.
Questions:
a. How much salaries expense should be accrued by b. What should be the adjusting entry of RNB Laundry
RNB Laundry Solutions on July 31? Solutions on July 31 to reflect the expenses already
incurred?
b. Accrued Income
(1) Accrued revenue
On October 1, 2015, SIPA Accounting Office started rendering bookkeeping services to a client for a monthly
retainer fee of P50,000. By the end of 2015, SIPA has not yet billed the client for any retainer fee for the past
three months of services already rendered.
Questions:
a. What was the initial entry of SIPA Accounting (c.1) 2015 Fees Earned
Office on October 1 related to its retainer contract (c.2) 2015 profit
with its client? (c.3) December 31 assets
b. How much accounts receivable should be accrued (c.4) December 31 owner’s equity
by SIPA Accounting Office on December 31, 2015? d. What should be the adjusting entry of SIPA
c. Without any adjustments, what would the effect Accounting Office on October 31 to reflect the
on the following items in the financial statements revenues already earned?
(overstated, understated or correctly stated):
(2) Interest Receivable
On March 31, 2015, Sira Appliances received a P400,000 note from a customer from a sale of an air conditioning
unit. The note will be paid in two annual installments of P200,000 starting March 31, 2016. The note carries
12% interest payable annually based on outstanding balance of the note at a given period.
Questions:
a. What was the journal entry of Sira Appliances on e. What will be the journal entry of Sira Appliances
March 31, 2015 related to its sale to customer? upon final settlement of the customer on March
b. What will be the adjusting entry of Sira Appliances 31, 2017?
on December 31, 2015 to reflect interest already f. How much is the total interest income of Sira
earned? appliances in 2015?
c. What will be the journal entry of Sira Appliances g. How much is the total interest income of Sira
upon receipt of the first installment and interest appliances in 2016?
payment from the customer on March 31, 2016? h. How much is the total interest income of Sira
d. What will be the journal entry of Sira Appliances appliances in 2017?
on December 31, 2016 to reflect interest already
earned?
4. Depreciation
On January 1, 2015 Alpha Co. bought a computer equipment amounting to P370,000 for cash. The computer equipment
has useful life of three (3) years and can be sold as scrap for P10,000 at the end of its useful life. The computer
equipment was sold on April 1, 2017.
Questions:
a. What was the journal entry of Alpha Co. on January e. What is the amount of accumulated depreciation as of
01, 2015 related to its purchase of the computer 1) December 31, 2015
equipment? 2) December 31, 2016
b. What is the journal entry of Alpha Co. on December f. What is the carrying amount of the computer
31, 2015 to adjust for the depreciation of the equipment as of
computer equipment? 1) December 31, 2015
c. How much is the depreciation expense in 2) December 31, 2016
1) 2015 g. What is the journal entry on April 1, 2017 assuming:
2) 2016 1) The computer equipment was sold for P130,000
3) 2017 cash?
d. What is the cost of the computer equipment as of 2) The computer equipment was sold for P80,000
1) December 31, 2015 cash?
2) December 31, 2016
5. Allowance for doubtful accounts
On January 1, JV Co. has P500,000 beginning balance in its Accounts Receivables. The related Allowance for
Doubtful Accounts has a beginning balance of P10,000. Total Sales for the year amounted to P2,000,000, of which
HO – 04 | 3 of 5
Adjusting Process s
P1,200,000 were made on credit. Collections on account totaled P650,000. Accounts totaling P5,000 were proved
to be worthless and needed to be written off. Accounts previously written off amounting to P2,500 were recovered
during the year. Aging of the Accounts Receivables as of December 31 is as follows:
Age Amount
Current P500,000
1 – 30 days 300,000
31 – 60 days 150,000
Over 60 days 95,000
Questions:
a. What is the journal entry to record the sales for the (1) direct write-off method ?
year? (2) allowance method
b. What is the journal entry to record the collection of on 2.1. If doubtful accounts are recognized at 1%
account receivables? of Sales for the year
c. What is the journal entry to record the write-off of 2.2. If doubtful accounts are recognized at 2%
accounts receivable under of Ending Receivables
(1) direct write-off method ? 2.3. If doubtful accounts are recognized based
(2) allowance method? on aging of ending receivables with the
d. What is the journal entry to record the recoveries of following probabilities of collectability:
the account under: Current: 100% collectable; 1 – 30 days:
(1) direct write-off method ? 98% collectable; 31 – 60 days: 95%
(2) allowance method? collectable; over 60 days: 90%
e. What is the journal entry to record doubtful account collectable.
expense at the end of the year under
6. Alternative method of recording deferrals
c. Prepaid Expenses [Expense Method]
(1) Supplies
X’s Print Shop purchased advertising supplies costing P50,000 on October 5. X’s Print Shop debited the account
Supplies Expense. This account shows a balance of P50,000 in the October 31 trial balance. An inventory count at the
close of business on October 31 reveals that P20,000 of supplies are still on hand.
Questions:
a. What was the initial entry of X’s Print Shop on October 5 related to purchase of Supplies?
b. How much supplies were used during October?
c. Without any adjustments, what would the effect on the following items in the financial statements (overstated,
understated or correctly stated):
(c.1) October expenses
(c.2) October profit
(c.3) October 31 assets
(c.4) October 31 owner’s equity
d. What should be the adjusting entry of X’s Print Shop by October 31 to reflect the actual consumption of supplies?
(2) Insurance
On July 4, Y paid P48,000 for a one-year fire insurance policy, beginning immediately. Z debited the cost of the
premium to a nominal account at that time. This account still shows a balance of P48,000 in the July 31 trial balance.
Questions:
a. What was the initial entry of Y on July 4 for the payment of premium to the policy provider?
b. How much premium expired during July?
c. Without any adjustments, what would the effect on the following items in the financial statements (overstated,
understated or correctly stated):
(c.1) July expenses
(c.2) July profit
(c.3) July 31 assets
(c.4) July 31 owner’s equity
d. What should be the adjusting entry of Y by July 31 to reflect the actual use of the premium?
(3) Rent
On March 1, 2015, ZFashion Boutique paid P240,000 for a 24-month rent in advance for the use of a stall in a flea
market. Zrecorded the amount paid in a temporary account. On December 31, 2015 trial balance, the temporary
account still shows P240,000 balance related to the rent paid last March 1.
Questions:
a. What was the initial entry of ZFashion Boutique (c.1) 2015 expenses
Concepts on March 1 related to the advance (c.2) 2015 profit
payment made to stall owners? (c.3) December 31 assets
b. How much rent payments were consumed during (c.4) December 31 owner’s equity
the year? d. What should be the adjusting entry of ZFashion
c. Without any adjustments, what would the effect on Boutique by December 31 to reflect the actual rent
the following items in the financial statements payments consumed?
(overstated, understated or correctly stated):
HO – 04 | 4 of 5
Adjusting Process s
d. Unearned Income [Revenue Method]
(1) Case 1
On April 1, W Solutions, a consulting business, received P1,000,000 advance payments from its clients for services to
be performed in the future. W Solutions recorded the same in the revenue account ‘Fees Earned.’ By the end of April,
W Solutions fulfilled 40% of the required work based on the contract with its clients. On April 30 trial balance, the
revenue account Fees Earned show P1,000,000 balance. Based on W Solutions’ Chart of Accounts, the business uses
Unearned Fees to record advance payment received from customers.
Questions:
a. What was the initial entry of W Solutions on April 1 (c.2) April profit
upon receipt of advance payments from its clients? (c.3) December 31 liabilities
b. How much fees were earned during April? (c.4) December 31 owner’s equity
c. Without any adjustments, what would the effect on d. What should be the adjusting entry of W Solutions
the following items in the financial statements by April 30 to reflect the actual fees already
(overstated, understated or correctly stated): earned?
(c.1) April revenues
(2) Case 2
On December 1, R.S. Advertising Concepts received P120,000 payments in advance for advertising a local product in
one of the billboards it owns for six months starting December 1. On December 31, trial balance, R.S. Advertising
Concepts shows the following partial trial balance:
R.S. Advertising Concepts
Trial Balance
December
Account Account Title (Dr.) (Cr.)
No.
101 Cash P 348,000
… … …
… … …
110 Land 1,048,000
111 Billboard fixtures 453,000
201 Accounts payable P45,000
202 Unearned advertising
revenues 0
207 Loans payable 500,000
… … …
… … …
301 RS, Capital 623,000
… … …
401 Advertising revenue 120,000
501 Salaries expense 36,000
… … … __________
Total P4,879,000 P4,879,000
Questions:
a. What was the initial entry of R.S. Advertising (c.1) December revenues
Concepts on December 1 related to the receipt of (c.2) December profit
advance payments from its customers? (c.3) December 31 liabilities
b. How much advertising revenues were earned (c.4) December 31 owner’s equity
during December? d. What should be the adjusting entry of R.S.
c. Without any adjustments, what would the effect on Advertising Concepts by December 31 to reflect the
the following items in the financial statements actual advertising revenues already earned?
(overstated, understated or correctly stated):
☺ End of HO – 04 ☺
HO – 04 | 5 of 5