Use the following information for the next four questions: Entity A is preparing its December 31,

20x1 financial statements. Provide the year-end adjusting entries for the following.

1. Entity A entered into a 1-year contract for a billboard advertising on August 1,20x1. The
monthly rent for the billboard is P200,000, payable at the start of each month. Entity A has paid
the rentals for the months of August to November 20x1.

Step 1: Transaction analysis

Accounts affected: “Advertising Expense” (expense) and “Advertising Payable” (liability)

Effects on accounts: Advertising Expense is increased, Advertising Payable is increased
Debit / Credit: Expense is increased through debit. Liability is increased through credit
Dec 31, 20x1 Advertising Expense 200,000
Advertising Payable 200,000
to accrue advertising expense

Step 2: Adjusting journal entry (AJE)

2. Entity A received a 10% P180,000, 1-year, note receivable from a customer on October 31,
20x1. Both principal and interest on the note are due on November 1, 20x2.

Formula:

I=pxrxt

Interest = (180,000 x 10% x 3/12) = P4,500

Step 1: Transaction analysis

Accounts affected: “Interest Receivable” (asset) and “Interest Income” (income)

Effects on accounts: Interest receivable is increased, Interest income is increased
Debit / Credit: Asset is increased through debit. Income is increased through credit

Dec 31, 20x1 Interest Receivable 4,500

Interest Income 4,500
To accrue interest income earned but not yet collected
Step 2: Adjusting journal entry (AJE)
Adjusting entry for the accrued interest income:
3. Entity A acquired a machine on November 30, 20x1 for P420,000. The machine has an
estimated useful life for 8 years.

Formula:
Cost P420,000
Divide by: Useful life 8
Annual depreciation expense P52,500

Step 1: Transaction analysis

Accounts affected: “Depreciation Expense” (expense) and “Accumulated Depreciation”

(contra-asset)
Effects on accounts: Depreciation expense is increased, Accumulated depreciation is
increased
Debit / Credit: Expense is increased through debit. Contra-asset is increased through
credit

Step 2: Adjusting journal entry (AJE)

Dec 31, 20x1 Depreciation Expense 52,500

Accumulated Depreciation 52,500
To record the depreciation expense for the period

4. Entity A has a total accounts receivable of P890,000 as of December 3, 20x1. Of that amount,
P45,000 were estimated to be doubtful of collection.

Accounts affected: “Bad debts expense” (expense) and “Allowance for bad debts” (contra-
asset)
Effects on accounts: Bad debts expense is increased, Allowance for bad debts is increased
Debit / Credit: Expense is increased through debit. Contra-asset is increased through
credit
Step 1: Transaction analysis

Step 2: Adjusting journal entry (AJE)

Dec 31, 20x1 Bad debts expense 45,000

Allowance for bad debts 45,000
to record the bad debts expense for the period

Accounts receivable P890,000

Allowance for bad debts (45,000)
Accounts receivable – net P845,000

5. On May 1, 20x1, Entity B received one-year advanced rent of P480,000 from one of its
tenants. The advanced rent covers the month of May 1, 20x1 to April 30, 20x2.

a. Provide the journal entry to record the collection on May 1, 20x1 under each of the following
methods:

i. Liability method

May 1, 20x1 Cash 480,000

Unearned Rent 480,000
to record the receipt of 1-year rent in advance

ii. Income method

May 1, 20x1 Cash 480,000

Rent Income 480,000
to record the receipt of 1-year rent in advance

b. Provide the adjusting entries on December 31, 20x1 under each of the following methods
listed above:

i. Liability method

Dec 31, 20x1 Unearned Rent 320,000

Rent Income 320,000
to recognize the earned portion of rent income

ii. Income method

Dec 31, 20x1 Unearned Rent 160,000

Rent Income 160,000
to recognize the portion of unearned the 1-year rent
in advance

6. On August 1, 20x1, Entity C paid one-year insurance of P360,000

a. Provide the journal entry to record the prepayment on August 1, 20x1 under each of the
following methods:

i. Asset method
 Aug 1, 20x1 Prepaid Insurance 360,000
Cash 360,000
to record the one-year insurance prepayment

ii. Expense method

Aug 1, 20x1 Insurance Expense 360,000

Cash 360,000
to record the one-year insurance prepayment

b. Provide the adjusting entries on December 31, 20x1 under each of the following methods
listed above.

i. Asset method

Dec 31, 20x1 Insurance Expense 150,000

Prepaid Insurance 150,000
to recognize the used portion insurance expense

ii. Expense method

Dec 31, 20x1 Prepaid Insurance 210,000

Insurance Expense 210,000
to record the unused portion of 1-year insurance

Company D has 100 employees, each earning an average daily rate of P600. Company D’s last
salary payment date in 20x1 was on December 27, 20x1. However, 25 employees were required
to render overtime work during the last three days of December 20x1. The compensation for the
overtime work, which was considered “double-pay”, was paid during the first week of January
20x2. What is the adjusting entry on December 31,20x1?

Dec 31, 20x1 Salaries Expense 75,000

Salaries Payable 75,000
to accrue salaries expense

2. Entity Z received a 10%, P1,000,000, one-year, note from a customer on August 1, 20x1. Both
the principal and interest on the note are due at maturity date. What is the adjusting entry on
December 31, 20x1? (Round-off amounts to two decimal places)

Formula:

I=pxrxt

I = (1,000,000 x 10% x 5/12) = P41,666.67

 Dec 31, 20x1 Interest Receivable 41,666.67
Interest Income 41,666.67
to accrue interest income earned but not yet
collected

3. ABC company issued a 12%, P350,000, one-year, note payable on May 1, 20x1. ABC
company uses a calendar year period. The principal and interest on the note are due on May 1,
20x2. What is the adjusting journal entry on December 31, 20x1?

Formula:

I=pxrxt

I = (350,000 x 12% x 8/12) = P28,000

Dec 31, 20x1 Interest Expense 28,000

Interest Payable 28,000
to accrue interest expense incurred but not yet paid

4. Entity A received billing for mobile charges and internet fees for the month of December 20x1
totaling P13,000. Prior to payment, what is the entry to record the receipt of billing?

Dec, 20x1 Utilities Expense 13,000

Accounts Payable 13,000
to record the receipt of billing

5. On March 31, 20x1, Company 1 acquires a pickup truck for P1,600,000. The truck has an
estimated useful life of 5. What is the adjusting entry on December 31, 20x1 to take up
depreciation expense?

Annual depreciation expense is computed as:

Cost P1,600,000
Divide by: Useful life 5
Annual depreciation expense P320,000

Dec 31, 20x1 Depreciation Expense 320,000

Accumulated Depreciation 320,000
to record the depreciation expense for the period

6. Entity A’s unadjusted trial balance as of December 31, 20x1 shows “Prepaid Supplies” of
P34,000. The year-end physical count of supplies revealed unused supplies amounting to P8,000.
What is the adjusting entry?
 Dec 31, 20x1 Supplies Expense 24,000
Prepaid Supplies 24,000
to recognize the used portion of supplies
7. Entity X unadjusted trial balance as of December 31, 20x1 shows “Supplies Expense” of
P34,000. The year-end physical count of supplies revealed unused supplies amounting to P8,000.
What is the adjusting entry?

Dec 31, 20x1 Prepaid Supplies 8,000

Supplies Expense 8,000
to recognize the unused portion of supplies

8. Entity A’s unadjusted trial balance as of December 31, 20x1 shows accounts receivable of
P340,000 and no allowance for bad debts. Entity estimates that 3% of the accounts are doubtful
collection. What is the adjusting entry?

Dec 31, 20x1 Bad debts expense 10,200

Allowance for bad debts 10,200
to record the bad debts expense for the period