ASSESSMENT ON ADJUSTING ENTRIES

BOOKEEPING NC III

Name of Trainee: ____________________________ Date:___________

General Instruction: Read and understand each item below and supply what is being asked.

PART I Multiple Choice. Encircle the letter that corresponds your answer.

1. What type of entry will increase the normal balance of the general ledger
account that reports the amount owed as of the balance sheet date for a company's
accrued expenses?
A. Debit

B. Credit
The amount owed for accrued expenses is reported in a liability account such as Accrued
Expenses Payable. Since a liability account is expected to have a credit balance, a credit
entry will increase the normal balance. [Recall that liabilities are on the right side of the
accounting equation. Credit entries appear on the right side of a T-account.]

2. What type of entry will decrease the normal balances of the general ledger
accounts Interest Receivable and Fees Receivable?
A. Debit

B. Credit

Receivables normally have debit balances. Therefore to decrease the debit balance in a
receivable account you will need to credit the account.

3. What type of entry will decrease the normal balances of the accounts Deferred
Revenues and Unearned Revenues?
A. Debit

B. Credit

Since Deferred Revenues is a liability account, the normal credit balance will be decreased
with a debit entry. For example, when some of the deferred revenues become earned, the
company will debit the Deferred Revenues and will credit a revenue account such as Service
Revenues.

4. What type of entry will decrease the normal balances of the accounts Prepaid
Insurance and Prepaid Expenses, and Insurance Expense?
A. Debit
 B. Credit
Since Prepaid Insurance and Prepaid Expenses are asset accounts, their normal debit balance
will be decreased with a credit entry.

Since expenses usually have debit balances, Insurance Expense will be decreased with a
credit entry.

5. What type of entry will increase the balances that are normally found in the
accounts Accumulated Depreciation and Allowance for Doubtful Accounts?
A. Debit

B. Credit
Since contra asset accounts have credit balances, the credit balance will become larger when
a credit entry is recorded.
6. The adjusting entry that reduces the balance in Prepaid Insurance will also
include which of the following?
A. A Credit To Cash

B. A Credit To Insurance Expense

C. A Debit To Insurance Expense

D. A Debit To Insurance Payable

As the debit balance in the asset account Prepaid Insurance expires, there will need to be an
adjusting entry to 1) debit Insurance Expense, and 2) credit Prepaid Insurance.

7. The adjusting entry that reduces the balance in Deferred Revenues or Unearned
Revenues will also include which of the following?
A. A Debit To Cash

B. A Credit To Fees Earned

C. A Debit To Fees Earned

D. A Credit To Fees Receivable

As the deferred or unearned revenues become earned, the credit balance in the liability
account such as Deferred Revenues needs to be reduced. Hence, the adjusting entry to record
these earned revenues will include 1) a debit to Deferred Revenues, and 2) a credit to Fees
Earned.
8. The ending balance in the account Prepaid Insurance is expected to report
which of the following?
A. The Accrued Amount Of Insurance Expense
 B. The Original Amount Of The Insurance Premiums Paid

C. The Expired Portion Of The Insurance Premiums Paid

D. The Unexpired Portion Of The Insurance Premiums Paid

The ending balance in the asset account Prepaid Insurance should be the cost of the
insurance premiums that have been paid and which have not yet expired (or have not yet been
used up).
9. The ending balance in the account Deferred Revenues (or Unearned Fees) should
report which of the following?
A. The Accrued Amount Of Fees That Have Been Earned

B. The Original Amount Of Fees Received In Advance From A Customer

C. The Fees Received In Advance Which Are Not Yet Earned

D. The Amount Of Fees Received In Advance And Which Are Now

Earned
When customers pay a company in advance, the company credits Unearned Revenues. Then
as the company earns some of the revenues, the account Unearned Revenues will be debited
and an income statement account such as Service Revenues or Fees Earned will be credited.
Thus, the remaining credit balance in Unearned Revenues is the amount received but not yet
earned.
10.Typically an adjusting entry will include which of the following?
A. One Balance Sheet Account And One Income Statement Account

B. Two Balance Sheet Accounts

C. Two Income Statement Accounts

Nearly all adjusting entries involve a minimum of one balance sheet account and a minimum of
one income statement account.

Part II Practical Application. Write your answers on the blanks provided. Kindy show your solutions for
items involving computations.

Use the following information to answer questions 11 - 14:

A company borrowed Php 100,000 on December 1 by signing a six-month note
that specifies interest at an annual percentage rate (APR) of 12%. No interest or
principal payment is due until the note matures on May 31. The company
prepares financial statements at the end of each calendar month. The following
questions pertain to theadjusting entry that should be entered in the company's
records.
11.What date should be used to record the December adjusting entry?
Answer
December 31 (the last day of the accounting period)

12.What is the name of the account that will be debited?

Answer
Interest Expense (an income statement account)
13.What is the name of the account that will be credited?
Answer
Interest Payable (a balance sheet account)
14.What is the amount of the debit and the credit?
Answer
P1,000.
Computation:
12% per year is 1% per month X $100,000 = P1,000 per month.

Another method is Principal X Rate X Time = P100,000 X .12 X 1/12 = $1,000.

As of December 31 the company owes just one month of interest. When the note becomes due,
the company will have to remit six months of interest for a total of P6,000 ($100,000 X .12 X
6/12).

Use the following information to answer questions 15 - 18:

On December 1, your company paid its insurance agent Php 2,400 for the annual
insurance premium covering the twelve-month period beginning on December 1.
The Php 2,400 payment was recorded on December 1 with a debit to the current
asset Prepaid Insurance and a credit to the current asset Cash. Your company
prepares monthly financial statements at the end of each calendar month. The
following questions pertain to the adjusting entrythat should be written by
the company.
15.What date should be used to record the December adjusting entry?
Answer
December 31
16.What is the name of the account that will be debited?
Answer
Insurance Expense (an income statement account)
17.What is the name of the account that will be credited?
Answer
Prepaid Insurance (a balance sheet account)
18.What is the amount of the debit and the credit?
Answer
P200.

Calculation:
 P2,400 divided by the 12 months of coverage = P200 per month. As of December 31 one month
has gone by, so one month of insurance has expired and belongs in expense. (This means that
the Prepaid Insurance account should have a balance of Php 2,200—11 months still prepaid or
unexpired X P200 per month.)
Use the following information to answer questions 19 - 22:
On December 1, your company paid its insurance agent Php 2,400 for the annual
insurance premium covering the twelve-month period beginning on December 1.
The Php 2,400 payment was recorded on December 1 with a debit to the income
statement account Insurance Expense and a credit to the current asset Cash. Your
company prepares monthly financial statements at the end of each calendar
month. The following questions pertain to the adjusting entry that should be
written by the company.
19.What date should be used to record the December adjusting entry?
Answer
December 31
20.What is the name of the account that will be debited?
Answer
Prepaid Insurance (a balance sheet account)
21.What is the name of the account that will be credited?
Answer
Insurance Expense (an income statement account)
22.What is the amount of the debit and the credit?
Answer
P2,200.

Calculation:
P2,400 divided by the 12 months of coverage = P200 per month. As of December 31 one month
has gone by, so one month of insurance has expired and belongs in Insurance Expense.
Presently there is a P2,400 debit balance in Insurance Expense. To reduce the Insurance
Expense to P200 you need to credit Insurance Expense for P2,200. Prepaid Insurance should
have a balance of P2,200 because 11 months of insurance is still prepaid or unexpired X P200
per month.
Use the following information to answer questions 23 - 26:
On December 1, XYZ Insurance Co. received Php 2,400 from your company for
the annual insurance premium covering the twelve-month period beginning on
December 1. XYZ Insurance Co. recorded the Php 2,400 receipt as of December 1
with a debit to the current asset Cash and a credit to the current
liability Unearned Revenues. XYZ Insurance Co. prepares monthly financial
statements at the end of each calendar month. The following questions pertain
to the adjusting entry that should be written by the XYZ Insurance Co.
23.What date should be used to record the December adjusting entry?
Answer
December 31
24.What is the name of the account that will be debited?
Answer
 Unearned Revenues (a balance sheet account)
25.What is the name of the account that will be credited?
Answer
Service Revenues (an income statement account)
26.What is the amount of the debit and the credit?
Answer
P200.
Calculation:
P2,400 divided by the 12 months of coverage = P200 per month. As of December 31 one month
has gone by, so one month of insurance has been earned and belongs in revenue. (This means
that the Unearned Revenues account should have a balance of P2,200—11 months still
unearned X P200 per month.)

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