QUALIFYING EXAM REVIEWER #1

ADJUSTING ENTRIES
ADJUSTING ENTRIES- is used to update the accounts and reflect the true balance at the end of
accounting period.
ACCOUNTING PRINCIPLES AND CONCEPTS THAT IS ESSENTIAL IN IDENTIFYING ADJUSTING ENTRIES:
1. Periodicity Concept-very important factor in adjusting accounts. It portrays the date where the
assets/liabilities occur at the moment it is earned/incurred. It is either fiscal/calendar year depending on
the company policy.
2. Accrual Basis of Accounting-it signifies that the transactions are earned regardless of when it is
received, and incurred regar-dless of when it is paid.
3. Matching Principle-It is matching cost with revenue. It is the principle that signifies the incurrence of
costs first before the related revenue earned.
4. Revenue and Expense Recognition Principle-It is principle that the revenue is earned only when it is
delivered and the related expense is incurred only when it is used.
5. Going Concern-A principle that the business is continue to exists in the foreseeable future.
3 Typical Expense Classifications:
1. Direct Association- Matching cost with related revenue. Example is commission expense, Cost of
Goods Sold on the related sales.
2. Systematic and Rational Allocation- Allocates the costs of the assets in the period of time. Example is
depreciation expense on the tangible assets, and the amortization expense on the intangible assets.
3. Immediate Recognition- Expense that takes place at the end of the period. Example is salaries
expense.
Deferral- expense already paid in advance before it is incurred and the revenue already received in
advance but not yet earned.
Accrual- expense already incurred before it is paid and the revenue already earned but not yet received.
Deferred Expense- already paid in advanced but not yet incurred. Example is Supplies, Prepaid Expenses,
and Depreciation Expense.
Important to remember:

Supplies- Used Portion –Asset Method is used. Initial Entry: Dr. Asset
-Unused Portion -Expense Method is used. Initial Entry: Dr. Expense
Prepaid Expenses- Expired Portion- Asset Method is used. Initial Entry: Dr. Asset
Unexpired Portion- Expense Method is used. Initial Entry: Dr. Expense
Depreciation Expense- Allocation of Expense over the several period- Straight Line Method is used.

Formula : Depreciation Expense=Cost – Salvage Value/ EUL; NOTE: in identifying depreciation, at the
date of acquisition.

Supplies Expense= beginning + purchases – on hand

Prepaid Expenses= Asset x related portion of expense/unused

Deferred Revenue- revenue already received in advance but not yet earned. Examples includes
Unearned Rent, Unearned Service Income
Unearned Revenue- Earned Portion- Liability Method is Used. Initial entry: Cr. Liability
Revenue- Unearned Portion- Revenue Method is used. Initial Entry: Cr. Revenue

Unearned Revenue= Revenue x Unearned Portion

Revenue= Revenue x Earned Portion

ADJUSTING ENTRY- Mostly consists of mixed accounts

Asset- Expense Real Accounts( Balance Sheet Accounts)
Liability-Revenue Nominal Accounts( Income Statement Accounts)

Accrued Expense- Expense already incurred but not yet paid. Examples are Salaries, Interest, Taxes,
Utilities, Rent.
*No method is needed in adjusting account balances.

Interest Expense= Principal x rate x time

Accrued Salaries= Pay rate per day x no. of employees x no. of days remaining
Tax Expense= Gross taxable income/sales x tax rate

Accrued Revenue- Revenue already earned but not yet received or recorded. Examples are Interest
revenue, Rent revenue, fees earned, etc.

Typical Characters in business transactions:

Depositor(ASSET) = Bank(LIABILITY)
Creditor/Lender(ASSET/REVENUE) = Debtor/borrower(LIABILITY/EXPENSE)
Lessee/Tenant(Expense/Payable) = Lessor/Landlord(Asset/Revenue)
Employee(Asset/Revenue) = Employer(Expense/Payable)

Notes Receivable-Interest Receivable(Depositor)

Notes Payable-Interest Payable(Bank)
Tax Payable(Taxpayer) = Tax Receivable(Government)

Allowance for doubtful accounts = Based on Ending AR(Balanced Sheet Approach) x rate
= Based on Credit Sales( Income Statement Approach) x doubtful rate

Adjusting entries Problems:

1. Salaries payable at the start of the year was P0. Salaries are paid every Friday for the current week.
Ten employees receive a salary of P7000 each per week. Employees do not work on weekends.
December 31 fell on a Wednesday. All employees worked the last day of December.
Q: The appropriate adjusting entry at the end of the year is_________________________

2. Forwarded a loan to another corporation on May 1, 2015 and received an 10-month, 14% note with a
face amount of P1,000,000.

Q: The appropriate adjusting entry to be made at December 31, 2015 is___________________

3. A delivery van was acquired on October 31, 2015 for P800,000. The company uses the straight-line
method in recording depreciation. The estimated useful life was 20 years and residual value of P10,000.

Q: The appropriate adjusting entry to be made at December 31, 2015 is___________________

4. The Allowance for Doubtful Accounts has an unadjusted balance of P1,000 as of December 31, 2015.
Based on aging of the receivables, it is determined that the balance of the allowance should be P2,500
at December 31.

Q: The appropriate adjusting entry to be made at December 31, 2015 is ___________________

5. Supplies costing P40,000 were acquired during the year and was recorded to a nominal account. A
count made on December 31, 2015 indicated that supplies on hand was P16500.

Q: The appropriate adjusting entry to be made at December 31, 2015 is___________________

6. Upahan Company began subleasing office space in its new building on July 1, 2015. At December 31,
BSA Company had the ff. rental contracts that are paid in full for the term of the lease. BSA Company
recorded all advance collections initially under revenue account
Date Term(Months) Monthly Rent #of Leases
Oct. 1 12 P7,500 2
Nov. 1 24 6,500 5

Q: The appropriate adjusting entry to be made at December 31, 2015 is___________________

7. San Marino Like No Other Advertising Company collected P 1,200,000 from one of its customers,
representing service fees for 12 months beginning May 1, 2015. At the time of collection, the
bookkeeper credited the account service fees for the whole amount.
Questions:

a. What method is used in recording the collection of the service fees?

b. As of December 31, 2015, how much of the amount collected is already earned?
c. As of December 31, 2015, how much of the amount collected is still unearned?
e. What should be the adjusting entry at December 31, 2015?
f. What if the initial entry is credited to unearned service fees, what would be the adjusting entry?
g. Supposed that the Company is using the revenue method, what would be adjusting entry for that?

8. Customer’s deposits amounting to P 100,000 are recorded as service income and non are earned as of
the year end, what would be the adjusting entry for that?

9. Mang Inasal Company assigns franchises to other enterprises under different schemes of franchise
agreements. In some instances, advance royalty is collected from the franchisee when the agreements
are signed, while in other cases, royalty is collected within 2 months after the end of each year.

During 2015, Mang Inasal collected royalties amounting to P 8,500,000. The following information is
included in the balance sheet of Mang Inasal Company as of December 31:

2014 2015
Royalties Receivable P 800,000 P 620,000
Unearned Royalties 430,000 557,000

Q: How much is the royalty income for the year?

10. Sana oll Company operates a retail store and must determine the proper December 31, 2016 year-
end accrual for the following expenses:

*The store lease calls for fixed rent of P10,000 per month payable at the beginning of the month.

*Additional rent equal to 6% of net sales over P2,000,000 per year payable on January 31 of the
following year.

Net Sales for 2016 amounted to P8,000,000.

*The entity has real property subject to real property tax. The city’s fiscal year runs July 1 to June 30 and
the tax assessed at 3% of real property on hand is payable on June 30, 2017.
The entity estimated that the real property tax will amount to P60,000 for the city’s fiscal year ending
June 30, 2017.

Q: On December 31, 2016, what amount should be reported as accrued expenses?

11. Flex ko lang Company sells 1-and-2 year subscriptions for its video-of-the-month business.
Subscriptions are collected in advance and credited to sales.

An analysis of the recorded sales activity revealed the following:

Sales-2016, 420,000; 2017, 500,000
Cancellations- 20,000; 30,000
Net Sales- 400,000; 470,000

Subscription expirations:
2016 120,000; -
2017 155,000; 130,000
2018 125,000; 200,000
2019 -; 140,000
Totals 400,000; 470,000

Q: On December 31, 2017, what amount should be reported as unearned subscription revenue?

12. Under the accrual basis, Adnag Etuc Ak Company reported rental income for the current year at
P600,000.

The entity provided the following additional information regarding rental income:

Unearned rental income, 01/01 50,000

Accrued rental income, 12/31 40,000
Unearned rental income, 12/31 75,000
Accrued rental income, 01/01 30,000

Q: What total amount of cash was received from rental in the current year?

13. On Nov. 1, 2017, Insured ako Company paid P36,000 to renew its insurance policy for 3 years. On
December 31, 2017, Insured Ako Unadjusted trial balance showed a balance of P900 for prepaid
insurance and P44,100 for insurance expense in Insured Ako December 31, 2017 financial statements?

14. On August 1, Adnag Company received cash of P9,324 for one year’s rent in advance and recorded
the transaction on that day as a credit to rent revenue, The December 31 adjusting entry would
include_____________?

15. The office supplies account had a balance at the beginning of 2017 of 4000 before the reversing
entry. Payments for purchases of office supplies during 2017 amounted to P25,000 and were recorded
as expense. A physical count at the end of 2017 revealed supplies costing P4,750 were on hand.
Reversing entries are used by the entity. The required adjusting entry at the end of 2017 will include a
debit to:

16. Hungria Corporation’s interest revenue for 2017 was P13,100. Accrued interest receivable on
December 31, 2017, was P2,275 and P1,875 on December 31, 2016. The cash received for interest
during 2017 was_______________.

17. Peralta Company acquired rights to a patent from Perello Co. under a licensing agreement that
required an advance royalty payment when the agreement was signed. Peralta remits royalties earned
and due under the agreement on October 31 each year. Additionally, on the same date, Peralta pays in
advance estimated royalties for the next year. Peralta adjusts prepaid royalties at year end. Information
for the year ended December 31, 2017 are shown below:

DATE
01/01/17 Prepaid royalties P260,000
10/31/17 Royalties payment(charged to royalties expense) 440,000
12/31/17 Year- end credit adjustment to royalty expense 100,000

In its income statement for the year ended December 31, 2017, Peralta should report royalties expense
of ?

18. Samyupsal Co.’s professional expense account had a balance of P92,000 at December 31, 2017
before considering year-end adjustments relating to the following:
Consultants were hired for a special project at a total fee not to exceed P65,000. Samyupsal has
recorded P55,000 of this fee based on billings for work performed in 2017.
The attorney’s letter requested by the auditors, dated January 28, 2018, indicated that legal fees of
P6,000 were billed on January 15, 2018 for work performed in November 2017 and that unbilled fees for
December 2017 were P9,000.
What amount should Samyupsal report for professional fees expense for the year ended December 31,
2017 ?

19. On July 1, 2016, Stanford Company leased office premises for a three-year period at an annual rental
of P360,000 payable on July 1 each year. The first rent payment was made July 1, 2016.

Additionally on July 1, 2016, the entity paid P240,000 as a lease bonus to obtain a three year lease
instead of the lessor’s usual term of six years.
On December 31, 2016, what amount should be reported as prepaid rent?

20. As an incentive to enter a four-year operating lease for a warehouse, Tulfo Company received an
upfront cash of P60,000 upon signing an agreement at the beginning of current year. The annual rental
is P1,115,000.

What amount should be recognized as lease expense for the current year?

MISCELLANEOUS TOPICS THAT SHOULD BE FOCUS ALSO:

Version 1.0 Manufacturing Statement

We have three inventories involved:
1. Raw Materials Inventory(RMI) or Direct Materials (DM)
2. Work in Process Inventory(WIP)
3. Finished Goods Inventory (FGI)

How to compute the Cost of Goods Manufactured?

Ans:
RMI, beginning
+RMI Purchases
=RMUITP (Raw Materials Used in the Process)
-RMI, ending
=RMU (Raw Materials Used)
+DL (Direct Labor)
+Factory Overhead(FOH)
=TMC (Total Manufacturing Cost)
+WIP, beginning
=WIPPDTY (Work in process during the year)
-WIP, ending
=COGMA (Cost of Goods Manufactured)

How to derived in COGS if the company is a Manufacturing?

Ans:
FGI, beginning + COGMA =TGAS – Ending FGI = COGS in Manufacturing Entity

How to compute for the Prime Cost?

Ans: Simply by adding DM + DL
Purpose: To determine the amount of cost that is directly attributable to the Production

How about Conversion Cost?

Ans: DL + FOH
Purpose: To determine the amount of cost that are convertible into finished goods

Important Notes:
*Direct Labor pertains to the personnel that are worked in the production
*Factory Overhead pertains to the costs that are supporting in nature for the entire production process.
All costs are incurred only in the factory are included in FOH.
*Indirect Materials and Indirect Labor are part of the Factory Overhead per se.

Sample Problems:

Ending Goods in Process 1,000,000

Depreciation on factory building 320,000
Beginning Raw Materials 400,000
Direct Labor 1,980,000
Factory supervisor’s salary 560,000
Depreciation on headquarters building 210,000

Beginning goods in process 760,000

Ending raw materials 340,000
Indirect Labor 360,000
Purchases of raw materials 2,300,000

What is the cost of goods manufactured for the current year?

Version 2.0 GROSS PROFIT METHOD

-A particular method that can be used by the accountants in determining the inventory destroyed by
the fire, etc.
FORMULA : GP/NS

SAMPLE PROBLEMS :
1. Etuc ka Company provided the following information:

2016
2017

Net Sales
7,500,000
4,500,000

Beginning Inventory
1,260,000
-

Purchases
6,450,000
3,180,000

Freight in
350,000
220,000

Purchase discounts
90,000
45,000

Purchase returns
120,000
40,000

Purchase allowances
20,000
15,000

Ending inventory
2,355,000
?

1. What is the amount of gross profit for 2016?

2. What is the gross profit rate for 2016?
3. What is the inventory on December 31, 2017?

2. On December 31, 2016, Kadenang Ginto Company had a fire which completely destroyed the goods in
process inventory. After the fire, a physical inventory was taken.

The raw materials were valued at P600,000, the finished goods at P1,000,000 and factory supplies at
P100,000 on December 31, 2016.
The inventories on January 1, 2016 consisted of the following:

Finished goods………………………………………………..1,400,000
Goods in process…………………………………………….1,000,000
Raw materials…………………………………………………300,000

Factory Supplies……………………………………………….400,000

Data for the current year

Sales………………………………………………………………..3,000,000
Purchases…………………………………………………………1,000,000
Freight in…………………………………………………………..100,000
Direct Labor………………………………………………………..800,000
Manufacturing overhead-50% of direct labor…………….?
Average gross profit rate on sales………………………………..30%

1. What is the cost of goods sold?

2. What is the cost of goods manufactured?
3. What is the estimated cost of the goods in process on December 31, 2016 that were completely
destroyed by fire?

……………………………………………………………..END…………………………………………………………………

QUOTES :
Remember that in studying accounting, we have to possess this 3 important aspects:C-onfident enough
P-erseverance
A-ttitude

“Don’t be afraid of losing in a test. It is a challenge of being a GREAT CPA.”

“You have suffer a difficult situation right now, but for tomorrow a better and ease life will come.”
“God has a great plans for us( Don’t lose hope, and be humble if you reach your dream in the future.”
“A learning is accompanied by effective teaching.”
“Preparation is a key to success(”
 GOD BLESS FUTURE CPAs(
STUDY WELL(

COVERAGE:
ADJUSTING ENTRIES
MANUFACTURING STATEMENT
GROSS PROFIT METHOD
INCOME STATEMENT
JOURNAL ENTRIES
THEORIES INVOLVING ACCOUNTING PROCESS
CASH FLOWS
ACCRUALS