ADJUSTING ENTRIES

A. SHORT PROBLEMS

1. ABC Company entered into a short-term loan agreement with the bank to finance its working capital. On
August 15, 2020, the company borrowed Php1,000,000 with an 8% interest per annum payable after 6
months. How much is the interest expense for the year ended December 31, 2020?
2. On May 31, 2020, DEF Company entered into a 10-year lease contract with one of its tenants. The lessee
paid a security deposit of Php100,000 and an advance rent of Php60,000 applicable during the first 3
months of the lease term and is also equivalent to the monthly rental during the first year of the lease
term. An escalation rate of 5% was agreed every year starting the second year of the lease term.
a. How much is the lease revenue for the year ended December 31, 2020?
b. How much is the lease revenue for the year ended December 31, 2022?
3. The company purchased a vehicle worth Php500,000 with a residual value of P20,000. The vehicle will be
used by the company for 3 years. How much is the net book value of the vehicle after 3 years?
4. The company paid for the software fee amounting to Php1,200,000 for 1-year. There’s 3 months left prior
to the end of the year.
a. How much is the amount to be recorded in the balance sheet at the end of the year?
b. Prepare entries using the asset and expense method at the end of the year.
5. On March 1, 2020, the company purchased clinic supplies that will be used for 6 months. Unfortunately,
the bookkeeper inaccurately recorded the transaction twice. The company uses the asset method in
recording the purchase of supplies. The erroneous entry was not corrected at the end of the fiscal year
April 30, 2020. As of April 30, 2020, balance of the clinic supplies was Php80,000.
a. Assuming that the amortization of the clinics supplies was accurate based on the erroneous entries
recorded, how much was the purchase price?
b. Prepare adjusting entries to correct the books.
c. How much is the adjusted balance of the clinic supplies as of April 30, 2020?
6. GHI Company paid its employees weekly at Php1,200 per hour. The year ended on a Wednesday. Assuming
there are 5 employees and are working on a 40-hour work shift.
a. How much is the salaries expense for the last week of the year?
b. How much of the salaries will be carried over the succeeding year?
B. LONG PROBLEM

Presented below is the Trial Balance of ABC Company as of December 31, 2020.

ABC Company
Trial Balance
December 31, 2020

Debit Credit
Cash 4,000,000.00
Accounts Receivable 1,150,000.00
Inventory 1,000,000.00
Prepaid Insurance 900,000.00
Equipment 1,200,000.00
Accounts Payable 3,500,000.00
Loans Payable 1,500,000.00
Share Capital 2,500,000.00
Revenue 6,000,000.00
Cost of Goods Sold 3,000,000.00
Salaries and Wages 1,000,000.00
Transportation Expense 450,000.00
Supplies Expense 800,000.00
Total 13,500,000.00 13,500,000.00

Below are some of the transactions that occur during the year 2020.

1. The company entered into a loan agreement with the bank on March 1, 2020 to finance its purchase of the
vehicle. The loan agreement is for 1 year with an annual interest of 8%. Interest will be paid at the end of
the term of the loan.
2. As of December 31, 2020, the company has not yet delivered the Php500,000 worth of goods but
immediately recorded it in its books as a receivable from its customer and a deduction in inventory.
3. The cost of goods sold of the company is 70% of its revenue. All goods sold by the company is immediately
deducted from its inventory.
4. The company directly expensed all its purchased office supplies. It usually purchases supplies that will be
used for 6 months. The bookkeeper recorded its last purchase on October 1, 2020 as an expense
amounting to P300,000.
5. On January 1, 2020, the company purchased the vehicle on account. This vehicle will be used for 3 years to
deliver its goods. The company uses the straight – line method of depreciation. As of December 31, 2020,
the bookkeeper accurately recorded the amount of depreciation. The transaction resulted to an increase in
the transportation expense and accounts payable.
6. On May 1, 2020, the company decided to purchase a 1-year policy to ensure the safety of its vehicle.
7. The company pays its employees every 15th and 31st of the month. Salaries and wages for the month of
December are Php500,000 and Php500,000 for the first and second half, respectively.
 8. The company received cash for a reservation of goods worth Php750,000 on December 31, 2020.
Unfortunately, due to the bulk of the transaction during year – end, the bookkeeper just kept the money in
the vault.

A. Prepare adjusting entries based on the transaction above.

B. Prepare the Adjusted Trial Balance for December 31, 2020.

 Refresher #4:
Recording Initial and Adjusting Entries
Practice Questions Key
1. The prepaid insurance account has $4,700 debit balance at the beginning of the year. A
review of insurance policies and payments shows that $900 of unexpired insurance
remains at year-end. Record the year-end adjusting entry related to this account.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Insurance Expense 3,800
Prepaid Insurance 3,800

2. Anderson Architects, Inc. decides that it wants to expand and will rent the office space
right next to the company’s current location. On October 1st, the company paid $4,800 to
rent the office space for the next six months.
a. What is the journal entry that Anderson Architects recorded on October 1st?
Date:  Account Descriptions:  DEBIT  CREDIT 
10/1 Prepaid Rent 4,800
Cash 4,800

b. Record Anderson Architect’s year-end adjusting entry.

Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Rent Expense 2,400
Prepaid Rent 2,400

3. Tick, Inc. charges $75 per month for treating a house for a pest infestation. A customer
paid $300 on October 1st in advance for four treatments. At year-end, the company has
applied three treatments for the customer.
a. Prepare Tick, Inc.’s journal entry for the October 1st transaction.
Date:  Account Descriptions:  DEBIT  CREDIT 
10/1 Cash 300
Unearned Service Revenue 300

b. Prepare Tick, Inc.’s year-end adjusting entry.

Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Unearned Service Revenue 225
Service Revenue 225
4. On May 1st, a company purchased a two-year insurance policy for $24,000 with coverage
to begin immediately.
a. What was the journal entry that the company recorded on May 1st?
Date:  Account Descriptions:  DEBIT  CREDIT 
5/1 Prepaid Insurance 24,000
Cash 24,000

b. How much insurance expense will be recorded on the company’s income

statement for the current year ending December 31st?

$24,000/24 months = $1,000 per month * 8 months = $8,000

c. What is the year-end adjusting entry that the company will record?
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Insurance Expense 8,000
Prepaid Insurance 8,000

5. The unearned rent revenue account has a beginning credit balance of $15,000. After the
adjusting entry at the end of the accounting period, $5,000 of the original $15,000
remains unearned. What was the year-end adjusting entry that the company made on
December 31st? Assume no other entries were made to the unearned rent revenue
account during the year.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Unearned rent revenue 10,000
Rent Revenue 10,000

6. Before adjusting entries are recorded, the unearned service revenue account at the end of
December has a credit balance of $2,400, representing an advance payment received from
a customer from earlier in the month. $1,600 of the revenue is earned during the month
of December. Record the adjusting entry required at the end of the month.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Unearned Service Revenue 1,600
Service Revenue 1,600
7. A newspaper company sold subscriptions to several customers on October 1st. The
subscriptions were for six months and delivery began immediately. $600 in total was
collected from the customers for the subscriptions on October 1st.
a. Record the journal entry that the company recorded on October 1st.
Date:  Account Descriptions:  DEBIT  CREDIT 
10/1 Cash 600
Unearned Subscription Revenue 600

b. Record the newspaper company’s adjusting entry on December 31st.

Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Unearned Subscription Revenue 300
Subscription Revenue 300

8. On December 31st of the current year, a company owes $960 of interest on a bank note
that will not be paid until July of the following year. What is the appropriate adjusting
entry recorded by the company on December 31st? Assume no other adjusting entries
related to the interest have been recorded during the year.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Interest Expense 960
Interest Payable 960

9. Scott’s Lawn Service borrowed $10,000 from 1st National Bank on November 1st of this
year. The loan is for a term of three years and carries a 15% annual interest rate. Interest
is due at the maturity of the loan. To properly accrue interest expense for the current
year, what journal entry should Scott’s Lawn Service make on December 31st?
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Interest Expense 250
Interest Payable 250

10. Sandra’s Styling Salon pays weekly salaries of $8,000 every Friday for the five-day work
week ending on that day. If the accounting period ends on Tuesday, February 28th, what
is the adjusting entry that would be required?
Date:  Account Descriptions:  DEBIT  CREDIT 
2/28 Salaries Expense 3,200
Salaries Payable 3,200
11. Raptor Inc. pays its sales representative a 5% commission of the sales that she makes.
Raptor had total annual sales of $500,000 (all made by the sales representative), but paid
only $20,000 in commissions before December 31st. What is the year-end adjusting entry
recorded by the company on December 31st?
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Sales Commission Expense 5,000
Sales Commissions Payable 5,000

12. Rental Services, Inc. earned $2,000 of Rent Revenue in December, but does not expect
payment until January of the following year. What is the appropriate journal entry that
the company will record for the month of December?
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Rent Receivable (or Accounts Receivable) 2,000
Rent Revenue 2,000

13. On December 15th of the current year, Larry’s Laptop Repair rendered $300 worth of
services to a customer to repair a laptop. However, the payment has not yet been
collected. It was agreed that the customer will pay the amount on January 15th of the
following year. The transaction was never recorded in the books of the company.
Record the year-end adjusting entry.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Accounts Receivable 300
Service Revenue 300

14. On December 1st, Viper Company lent $9,000 to Finn Inc. at a 10% annual interest rate.
The original amount borrowed and the accrued interest will be collected from Finn Inc.
after 6 months. What is the adjusting entry that Viper Company will record for the
interest on December 31st?
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Interest Receivable 75
Interest Revenue 75
 15. A company has a piece of factory equipment that it purchased on January 1st. The
equipment had a cost of $26,000 and an estimated life of 5 years. It is expected to be
valued at $500 at the end of its 5-year life. Straight-line depreciation was used.

a) What was the journal entry made when the equipment was purchased?
Date:  Account Descriptions:  DEBIT  CREDIT 
1/1 Equipment 26,000
Cash 26,000

b) What is the annual depreciation expense?

(Cost – Salvage Value)/Useful Life = ($26,000 - $500)/5 years = $5,100

c) What was the adjusting entry made at the end of the year for this equipment? Assume
no other adjusting entries were made during the year.
Date:  Account Descriptions:  DEBIT  CREDIT 
12/31 Depreciation Expense 5,100
Accumulated Depreciation 5,100
 STRAIGHT PROBLEMS. Prepare what is required for each of the items below. Treat each case
independently.
1. In 2015, FUTURE CPA Inc. bought officie supplies for P27,000 cash and debited the same to an
expense account. At year-end, 2/3 of the office supplies remain unspent. What is the adjusting
journal entry at year end?
2. FUTURE CPA Inc. Corporation received cash of P13,500 on September 1, 2015 for one year’s rent
in advance and recorded the transaction with a credit to Unearned Rent. The December 31, 2015
adjusting entry is?
3. FUTURE CPA Inc. paid cash of P18,000 on June 1, 2015 for one year’s rent in advance and
recorded the transaction with a debit to Prepaid Rent. The December 31, 2015 adjusting entry is?
4. FUTURE CPA Inc. received advance payment from a customer on October 31, 2015 worth
P510,000 in consideration for future services to be rendered starting November 1, 2015. FUTURE
CPA recorded the same in Unearned Service Revenue account. If FUTURE CPA already rendered
60% of the required work by year-end, what is the December 31, 2015 adjusting entry?
5. FUTURE CPA Inc. received P6,400 on April 1, 2015 for one year's rent in advance and recorded the

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transaction with a credit to a nominal account. The December 31, 2015 adjusting entry is?

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6. FUTURE CPA Inc. paid P3,600 on June 1, 2015 for a two-year insurance policy and recorded the

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entire amount as Insurance Expense. The December 31, 2015 adjusting entry is?

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7. FUTURE CPA Inc. purchased equipment on November 1, 2015 and gave a 3-month, 9% note with
a face value of P20,000. The December 31, 2015 adjusting entry is?

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8. FUTURE CPA Inc. received cash of P18,000 on August 1, 2015 for one year's rent in advance and

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recorded the transaction with a credit to Rent Revenue. The December 31, 2015 adjusting entry
is?
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9. FUTURE CPA Inc. loaned P90,000 to another corporation on December 1, 2015 and received a 3-
month, 8% interest-bearing note with a face value of P90,000. What adjusting entry should
FUTURE CPA make on December 31, 2015?
10. The accountant of FUTURE CPA Inc. made the following adjusting entry on December 31, 2015.
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Prepaid Rent P1,800

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Rent Expense P1,800

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If annual rent is paid in advance every October 1, the original transaction entry made on October
1 was?
11. The accountant of FUTURE CPA Inc. made the following adjusting entry on December 31, 2015:
Rent Revenue P900
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Unearned Rent P900

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If annual rent is received in advance every March 1. The original transaction entry made on March
1 was?
12. Three-days’ worth salaries are unpaid as at Dec. 31. Salaries are ₱75,000 bi-weekly for a five-day
work week. Prepare the adjusting journal entry as of December 31.
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13. FUTURE CPA Inc. pays its employees every 8th and 22nd day of the month. There are five
workdays within a workweek. The last payday was on May 22, 2015 (a Tuesday). By month-end,
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there are already seven days of accrued salaries. The pay scale at FUTURE CPA is as follows:
Category No. in Category Daily Rate per Employee
Executives 3 1,000
Managers 6 750
Staff 36 400
Prepare the adjusting entry at the end of the month.
14. FUTURE CPA Inc. sells magazine by subscription for ₱15 per copy. During the year, 47,200 two-
year subscriptions were sold. As at June 1, 2015, the Unearned Magazine Revenues account had
a balance of ₱315,000. At year-end, it is determined that the liability to provide subscribers’
future magazines amounted to ₱613,000. Prepare the adjusting entry at year-end.

COMPREHENSIVE PROBLEM NO. 1

The following information relates to Pili Corporation for the year ended December 31, 2015:
Allowance for doubtful accounts, 1/1/15 P300,000

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 Bad debts written off in 2015 187,500
Recovery of bad debts written off 50,000
Sales 5,000,000
Accounts receivable, 12/31/15 2,375,000
Estimated doubtful accounts per aging of accounts on 12/31/15 200,000
REQUIREMENTS:
Determine the amount of allowance for doubtful accounts balance as of December 31, 2015 and the
doubtful accounts expense for the year ended December 31, 2015 under the following methods: (Fill up
the table on your answer sheet)
METHOD ALLOWANCE (ADA) DOUBTFUL ACCTS. EXP.
Direct Write off Method (1) (2)

3% of Sales (3) (4)

8% of Accounts Receivable (5) (6)

Aging of Accounts Receivable (7) (8)

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COMPREHENSIVE PROBLEM NO. 2
The following balances have been excerpted for Buzz’s statement of financial position:

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Dec. 31, 2015 (Ending) Dec. 31, 2014 (Beginning)

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Prepaid insurance P1,100 P1,500
Interest receivable 2,700 2,200

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Salaries payable 12,200 10,500
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1. How much is the insurance expense in 2015?
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2. How much is the interest revenue in 2015?
3. How much is the salary expense in 2015?

COMPREHENSIVE PROBLEM NO. 3

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On December 31, 2015 the Accountant prepared the following adjustments:

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Account Title Debit Credit Account Title Debit Credit

1 Insurance Expense 45,000 5 Unearned Subscription 25,000
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Prepaid Insurance 45,000 Subscription Income 25,000

2 Salaries Expense 2,500 6 Commission Income 12,000
Salaries Payable 2,500 Unearned Commission 12,000
3 Prepaid Rent 120,000 7 Depreciation Expense 18,000
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Rent Expense 120,000 Accum. Depreciation 18,000

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4 Supplies Expense 15,000 8 Bad Debts Expense 3,600

Supplies 15,000 Allow. For Bad Debts 3,600
Based on your findings, the following items were disclosed:
 The insurance commenced in April 1, 2013 and will cover until April 1, 2016.
 Salaries are paid weekly every Saturday for 6 working days. December 31, 2015 is Friday.
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 Supplies has P3,500 balance as of January 1, 2015 and P9,800 on December 31, 2015.
Purchase of supplies was made on March 11, 2015.
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 A subscription contract for 1 year was received on November 1, 2015.

 The commission arose from a 1-year contract entered into with its client starting July 31,
2015.
 The rent is contracted for two years starting September 1, 2015.
 The equipment was acquired on February 28, 2014 and estimated to have useful life of 5
years. Scrap value is P40,000
 The bad debt is based on sales of 2%. The balance of allowance for bad debts (Dr.) is P4,500.
The bad debts written off is P3,200
REQUIREMENTS: Find out the following:
1. The entry made in April 1, 2013.
2. The total salaries every week.
3. The entry made in March 11, 2015.
4. The entry made in November 1, 2015.
5. The entry made in July 31, 2014.

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 6. The entry made in September 1, 2015.
7. The entry made in February 28, 2014 assuming 40% down-payment was made and the balance
by a note.
8. The balance for Allowance for Bad Debts at December 31, 2015.
9. Assuming the accounts receivable at December 31, 2015 before adjustment is P600,000 and the
company estimated that 5% of its accounts receivable is uncollectible. Prepare the adjusting
entry.
10. In connection with 9, compute the carrying amount of the accounts receivable.

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