Professional Documents
Culture Documents
ACCRUALS
Accrual of expense
Scenario:
Geraldine Printing Press (GPP) recently hired the four part-time employees to fill-up vacancies in its
operations. GPP pays it part-time employees P550 per day on a monthly basis that is released every
26th day of the month. Salaries paid covers the services rendered from the 26th day of the previous
month until the 25th of the current month (for example, salaries paid on March 26 covers the services
provided by the part-time employees from February 26 up to March 25) . For the year-ended April 30,
2021, the last part-time employee salary released was on April 26, 2021 to pay for services rendered
by said employees from March 26 up to April 25, 2021.
Prepared the adjusting entry to record the unpaid salaries as of April 30, 2021. Assume that the
period from April 26 to 30 are working days for purposes of this exercise.
Analysis:
Since the entity has yet to pay the part-time employee salaries from April , an accrual for the expense
incurred from April 26 to 30 (5 days) is warranted. Based on the information provided, the salaries for
accrual is computed as follows:
To recognize the salaries expense incurred but not is yet to be paid and recorded, the adjusting entry
should include a debit to the Salaries Expense account and a credit to the Accrued Salaries Payable
account for P11,000.
Answer:
Scenario:
JKL Financing engages in the business of lending money at a rate of 15% per annum to its customers.
Interest on loans is due on a monthly basis every 4 th day of the following month. Interest income is
normally recorded when received. As of December 31, 2020, the total outstanding loans to customer
amounted to P500,000. The last interest payment recorded was for the month of November 30, 2020
that was received on December 4, 2020.
Prepared the adjusting entry to record the interest income for the month of December 2020.
Analysis:
Since the entity has yet to receive the interest due for the month of December, an accrual for the
amount earned for December is warranted. Based on the information provided, the interest due on
the loan is computed as follows:
Since only the December interest is unrecorded as of year-end, the entity only needs to accrue
interest income of P6,250. To recognize the interest income already earned but not is yet to be
collected and recorded, the adjusting entry should include a debit to the Accrued Interest Receivable
account and a credit to the Interest Income account for P6,250.
Answer:
Scenario:
On September 1, 2020, Policarpio Enterprises paid P15,000 for the its building’s annual fire insurance
covering the period starting October 1, 2020 until September 30, 2021. The payment was debited to
the Prepaid Insurance account.
Analysis:
Since the insurance payment made was debited to Prepaid Insurance, it can inferred that the journal
entry created to record the payment is as follows:
The entity used the asset method to record the payment. To adjust the entry made to the prepaid
insurance account as of December 31, 2020, the entity needs to expense out the portion of the
payment made that is already expired and deemed incurred by the entity. Since the P15,000 paid
covers a twelve-month period, the entity incurs P1,250 of insurance expense on a monthly basis
(P15,000 ÷12 months). The expired and unexpired potion of the insurance payment of computed as
follows:
Expired portion: P1,250 x 3 months = P3,750 (Covering 3 months from October - December 2020)
Unexpired portion: P1,250 x 9 months = P11,250 (Covering 9 months from January - September2021)
Since the payment made is debited to Prepaid Insurance, the adjusting entry should include a debit to
Insurance Expense to recognize the expense already incurred, and a credit to Prepaid Insurance to
reduce the balance of the account and cover only the unexpired portion.
Answer:
Checking:
We can check the correctness of the adjustment by comparing the adjusted balance of the affected
accounts with the calculated expired and unexpired portion of the insurance payment made.
Scenario:
On November 30, 2020, Bonifacio Apparels paid P30,000 representing rental payment for six months
from December 1, 2020 until May 31, 2021. The payment was debited to the Rent Expense account.
Analysis:
Since the insurance payment made was debited to Rent Expense, the journal entry created to record
the payment is as follows:
The entity used the expense method to record the payment. To adjust the entry made to the rent
expense account as of December 31, 2020, the entity needs to defer or postpone the expense
recognition of the portion of the payment made that is yet to be utilized or used and shall be incurred
on the next accounting period. Since the P30,000 paid covers a six-month period, the entity incurs
P5,000 of rent expense on a monthly basis (P30,000 ÷ 6 months). The expired and unexpired potion
of the rental payment of computed as follows:
Expired portion: P5,000 x 1 months = P5,000 (for the month of December 2020 only)
Unexpired portion: P5,000 x 5 months = P25,000 (Covering 5 months from January - May 2021)
Since the payment made is debited to Rent Expense, the adjusting entry should include a debit to
Prepaid Rent for the unexpired portion of the the rent payment made , and a credit to Rent Expense
to reduce the balance of the account and cover only the expired portion.
Answer:
Checking:
We can check the correctness of the adjustment by comparing the adjusted balance of the affected
accounts with the calculated expired and unexpired portion of the rental payment made.
Scenario:
On August 28, 2020, Garcia General Services P32,000 from a customer for cleaning services for eight
months starting September 1, 2020. Upon receipt of cash, the amount received was recorded to the
Unearned service revenue account. The related service is expected to be rendered evenly throughout
the period covered by the payment.
Analysis:
Since the cash received was recorded to the Unearned Service revenue account, the journal entry
made to record the transaction follows:
The entity used the liability method to record the receipt of cash from the customer. To adjust the
entry made to the Unearned Service Revenue account as of December 31, 2020, the entity needs to
recognize the portion of the payment received that has already expired and deemed earned by the
entity. Since the P32,000 received covers an eight-month period, the entity earned P4,000 of service
revenue on a monthly basis (P32,000 ÷ 8 months). The expired and unexpired potion of the payment
received of computed as follows:
Earned portion: P8,000 x 4 months = P16,000 (Covering 4 months from September - December 2020)
Unearned portion: P8,000 x 4 months = P16,000 (Remaining 4 months from January - April 2021)
Since the payment made is credited to Unearned Service Revenue, the adjusting entry should include
a credit to Service Revenue to recognize the earned portion, and a debit to Unearned Service Revenue
to reduce the balance of the account and cover only the unearned portion.
Answer:
Checking:
We can check the correctness of the adjustment by comparing the adjusted balance of the affected
accounts with the calculated expired and unexpired portion of the cash received.
Scenario:
On May 1, 2020, Good News Videos (GNV) received P6,000 from customer for annual premium
subscription on their social media channel expiring on June 30, 2021. The cash received was recorded
to the Subscription Revenue account. The subscriber shall have unrestricted access to GNV’s social
media contents for the duration of payment received.
Analysis:
Since the cash received was recorded to the Subscription Revenue account, the journal entry made to
record the transaction follows:
The entity used the income method to record the receipt of cash from the customer. To adjust the
entry made to the Subscription Revenue account as of December 31, 2020, the entity needs to defer
or postpone the revenue recognition the portion of the payment received that is not yet earned and
will be earned in the next accounting period. Since the P6,000 received covers an annual period, the
entity earns P500 of subscription revenue on a monthly basis (P6,000 ÷ 12 months). The expired and
unexpired potion of the payment received of computed as follows:
Earned portion: P500 x 8 months = P4,000 (Covering 8 months from May - December 2020)
Unearned portion: P500 x 4 months = P2,000 (Remaining 4 months from January - April 2021)
Since the payment made is credited to Subscription Revenue, the adjusting entry should include a
credit to Unearned Subscription Revenue to record the unearned portion, and a debit to Subscription
Revenue to bring down the account balance equal to the earned portion.
Answer:
Checking:
We can check the correctness of the adjustment by comparing the adjusted balance of the affected
accounts with the calculated expired and unexpired portion of the cash received.
Scenario:
On July 1, 2020 On GHT Delivery Services purchased 5 motorcycles for used in its operations. The
trucks has a purchase price of P106,000 each. GHT expects these vehicles to be useful for the next
four years, and can be sold for P10,000 after the end of the vehicles’ life.
Prepare the adjusting entry on December 31, 2020 to depreciate the vehicles using the following
methods:
a. Straight-line method
b. Sum-of-year’s digits method
c. Double declining balance method
Analysis:
In determining the depreciation to be recognized for the service vehicles, the cost, economic useful
life and residual value needs to be determines.
Straight-line method
Under the straight-line method, the vehicle shall be depreciated evenly throughout its useful. The
annual straight-line depreciation computed by dividing the depreciable cost by the economic useful life
of the . In this scenario, the straight-line depreciation is computed at P120,000 (P480,000 ÷ 4 years).
For the first year, the vehicles shall be have a monthly depreciation of P10,000 (P120,000 ÷ 12
month). Since the vehicles were used from July 1, 2020 until December 31, 2020 for the year 2020,
the adjusting entry to record the depreciation for 2020 shall include a debit to the Depreciation
Expense - Vehicles account and a credit to the Accumulated Depreciation - Vehicles account by
P60,000 (6 months x P10,000 = P60,000).
Sum-of-year’s digits (SYD) method
Under the SYD method, depreciation is accelerated on the initial years and will diminish as the asset
nears the end of its useful life. The annual SYD depreciation computed by dividing the depreciable
cost by ratio derived by dividing the remaining useful life of the asset by the sum of the asset’s life
each.
For the first year, the vehicles shall be have a monthly depreciation of P16,333.33 (P192,000 ÷ 12
months). Since the vehicles were used from July 1, 2020 until December 31, 2020 for the year 2020, the
adjusting entry to record the depreciation for 2020 shall include a debit to the Depreciation Expense -
Vehicles account and a credit to the Accumulated Depreciation - Vehicles account by P98,000 (6 months x
P16,333.33 = P96,000).
Under the DDB method, depreciation is accelerated on the initial years and will diminish as the asset
nears the end of its useful life. The annual SYD depreciation computed by dividing the depreciable
cost by ratio derived by dividing the remaining useful life of the asset by the sum of the asset’s life
each.
Note that on the last year of the vehicles’ useful life, if the DDB formula is followed to compute for
the depreciation expense, the amount of depreciation that will be recorded shall be P33,125 and will
further reduce the net book value to P33,125, which is already below the expected residual value of
P50,000 on disposal of those assets . As such, on the last year of the useful life, the DDB formula shall
be discontinued and the depreciation expense shall be the difference between the remaining book
value and the residual value (P66,250 - P50,000 = P16,250)
For the first year, the monthly depreciation of the vehicles shall be P22,083.33 (P265,000 ÷ 12 months).
Since the vehicles were used from July 1, 2020 until December 31, 2020 during 2020, the adjusting entry
to record the depreciation for 2020 shall include a debit to the Depreciation Expense - Vehicles account
and a credit to the Accumulated Depreciation - Vehicles account by P132,500 (6 months x P22,083.33 =
P132,500).
Answer: