PROBLEM 1: TRUE OR FALSE

1. Adjusting entries are usually recorded at the beginning of each reporting period.
2. Adjusting entries are optional. An entity can prepare financial statements without
preparing first the adjusting entries.
3. All adjusting entries involve at least one balance sheet account and one income statement
account (or statement comprehensive income account).
4. All adjusting entries affect the profit or loss for the period (or comprehensive income for
the period).

5. In accounting, the phrase "to accrue" means to postpone the recognition of an income or
expense.

Use the following information for the next two questions:

Your business is renting a commercial space. The monthly rent is P100. At the start of Month 1,
you paid three-month advanced rent of P300.
6. If you prepare financial statements at the end of Month 1, your balance sheet will show a
"Prepaid rent" of P100.
7. If you prepare financial statements at the end of Month 1, your income statement will
show a "Rent expense" of P100.

8. The year-end adjusting entry for prepayments or advanced collections is the opposite of
the method used on initial recording. For example, if you have used the income method
on initial recording, your year-end adjusting entry would be to recognize a liability (i.e.,
the unearned portion).
9. One of the adjusting entries that Entity A has made at year-end involved a debit to a
prepaid asset account and a credit to an expense account. Entity A must have used the
'asset method' of initial recording of prepayments of expenses.
10. One of the adjusting entries that Entity B has made at year-end involved a debit to an
income account and a credit to liability (unearned income) account. Entity A must have
the 'income method' of initial recording of advanced collections of items of income.

PROBLEM 2: FOR CLASSROOM DISCUSSION

Accruals, depreciation and bad debts
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.

2. Entity A received a 10%, P180,000, one-year, note receivable from a customer on

October 31, 20x1. Both the principal and interest on the note are due on November 1,
20x2.
3. Entity A acquired a machine on November 30, 20x1 for P420,000. The machine has an
estimated useful life of 8 years.

4. Entity A has total accounts receivable of P890,000 as of December 31, 20x1. Of that
amount, P45,000 were estimated to be doubtful of collection.

Splitting of mixed accounts

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 months of May 1, 20x1 to April 30, 20x2.

Requirements:

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

i. Liability method
ii. Income method

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

6. On August 1, 20x1r Entity C paid one-year insurance P360,000.

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

i. Asset method
ii. Expense method

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

PROBLEM 3: ADJUSTING ENTRIES

Your business uses a calendar year accounting period. Th following were among your
transactions during the year:

1. Your business issued a 14%, P300,000, one-year, note payable on April 1, 20x1. Both the
principal and interest on the note are due at maturity date. What is the adjusting entry on
December 31, 20x1?

2. Your business received billing of P32,000 on December 29, 20x1 for utilities used in
December 20x1. Your business paid the bill on January 4, 20x2. What is the adjusting
entry December 31, 20x1?
3. Your business is renting a space for a monthly rental of P22,000. As of December 31,
20x1, your business has paid the December rent. What is the adjusting entry December
31, 20X1? (Hint: 'Rent payable')

4. Your business is sub-leasing (renting out) a portion of the space referred to in #3 above to
a tenant for a monthly rental of P4,000. As of December 31, the tenant has not yet paid
the rent for the months of November and December. What is the adjusting entry on (Hints:
'Rent income'; 'Rent receivable’)

5. Your business has total accounts receivable of P400,000 as of December 31, 20x1. Of
that amount, 5% is doubtful of collection and should be expensed. What is the adjusting
entry on December 31, 20x1?

6. Your business acquired a building on May 1, 20x1 for a total cost of P15,000,000. The
building has an estimated useful life of 20 years. Your business records depreciation only
at year-end. What is the adjusting entry on December 31, 20x1 ? (Hint: Depreciation normally
starts from the acquisition date of an asset.)

7. Your business collected royalty* income of P720,000 in advance on November 1, 20x1.

As of December 31, 20x1, P560,000 of the advanced collection is earned.

Requirements:
a. Provide the journal entry to record the collection on November 1, 20x1 under each of the
following methods:
i. Liability method
ii. Income method (Hints: 'Royalty income'; 'Unearned income')
b. Provide the adjusting entries on December 31, 20x1 under each of the methods listed
above.

Royalty income is the income you earn if you have invented something, wrote a book, composed a song, made a
YouTube video and have it copyrighted, or other artistic or literary work, and you let another party
use/publish/exploit your work in exchange for money. It is like renting out your work to another party.

8. Your business paid one-year fire insurance of P360,000 on October 31, 20x1.
Requirements:

a. Provide the journal entry to record the prepayment on October 31, 20x1 under each of the
following methods.
i. Asset method
ii. Expense method
b. Provide the adjusting entries on December 31, 20x1 under each of the methods listed
above.

PROBLEM 4: ADJUSTING ENTRIES

Your business uses a calendar year accounting period. following were among your transactions
during the year:
1. Your business received a 14%, P400,000, one-year, note from a customer on June 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)

2. Your employees earned P46,000 compensation during the lg week of December 20x1.
The salaries were paid on the first week of January 20x2. What is the adjusting entry
December 31, 20x1?

3. Your business received its electricity bill for the period amounting to P16,000. What is
the entry to record the of the bill prior to its payment?

4. Your business is renting a space. The monthly rent is P120,000. On December 31, 20x1,
the rent for the months of November and December 20x1 were not yet paid. What is
adjusting entry?

5. On February 1, 20x1, your business acquired computer equipment for P360,000. You
expect to use the computer over the next 3 years. What is the adjusting entry on
December 31, 20x1 to take up depreciation expense?

6. Your business has accounts receivable of P300,000. You estimated that out of that
amount, 10% is doubtful of collection and needs to be charged to expense. What is the
adjusting entry to record the doubtful accounts?

7. Your business is renting out properties. On June 1, 20x1, your business receives one-year
advanced rent of P360,000 from one of your tenants. The advanced rent covers the
months of June 1, 20x1 to May 31, 20x2.
Requirements:
a. Provide the journal entry to record the collection on June 1, 20x1 under each of the
following methods:
i. Liability method
ii. Income method

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

8. Your business pays one-year insurance of P360,000 on September 1, 20x1.

Requirements:
a. Provide the journal entry to record the prepayment on September 1, 20x1 under each of
the following methods:
i. Asset method
ii. Expense method

b. Provide the adjusting entries on December 31, 20x1 under each of the methods listed above.
PROBLEM 5: ADJUSTING ENTRIES

1. Entity A has 100 employees, each earning an average daily rate Of P600. Entity A'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-time pay” was paid
during the first week of January 20x2. What is the adjusting December 31, 20x1?

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

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

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

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

6. Entity A's unadjusted trial balance as of December 31, shows "Prepaid supplies" of
P34,000. The year-end physical count of supplies revealed unused supplies amounting
P8,000. What is the adjusting entry?

7. Entity A's 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?

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

PROBLEM 6: MULTIPLE CHOICE

1. Entity A obtained a 12%,P100,000 one-year loan on October 1, 20x1. On October 1,

20x2, Entity A paid the lender P112,000, representing settlement of both the principal
and interest on the loan. The P12,000 total interest should be recognized as interest
expense

a. 20x1. c. partly in 20x1 and partly in 20x2.

b in 20x2. d. Not recognized as expense
2. The instance described in #1 above is an application of which following accounting concepts?

a. Accrual c. Matching
b. Time period d. a and b

3. Which of the following is a correct sequence of steps in the accounting cycle?

a. Identifying, Journalizing, Posting, Adjusting entries, Unadjusted trial balance
b. Journalizing, Identifying, Posting, Adjusting entries, Unadjusted trial balance
c. Identifying, Journalizing, Posting, Unadjusted trial balance, Adjusting entries
d. Step 1, Step 2, Step 3...and so on.

4. The purpose of adjusting entries is

I. to take up unrecorded income and expense for the period.
II. to split mixed accounts into their real and nominal elements.
III. to transfer financial data from the journal to the ledger.

a. I only c. I and II
b. I, II, and III d. II and III

5. Adjusting entries are usually made

a. every day, including Sundays and Holidays.
b. at the end of each month.
c. only when financial statements are prepared.
d. when the accountant is feeling happy and in love,

6. Which of the following is least likely to be an adjusting

a. The entry to accrue salaries already earned by employees but not yet paid by the
company.
b. The entry to record the annual depreciation of equipment at year-end.
c. The entry to recognize the earned portion of an advance collection of income.
d. The entry to record the temporary withdrawals of ownerfrom the business.

7. Which of the following is most likely to be an adjusting entry?

a. The entry to record the prepayment of insurance.
b. The entry to record the advanced collection of rent income.
c. The entry to record a sale on account.
d. The entry to record doubtful accounts expense.

8. These accounts are not closed at the end of the accounting period, but rather carried over
to the next period.
a. Real accounts c. Mixed accounts
b. Nominal accounts d. Carryover accounts

9. Which of the following is a nominal account?

a. Cash c. Owner's equity
 b. Accumulated depreciation d. Owner's drawings

10. The following accounts appear on an entity's unadjusted trial balance:

I. Cash 190,000
II. Accounts receivable 140,000
III. Inventory 370,000
IV. Prepaid supplies 60,000
V. Equipment 900,000
VI. Unearned rent income 220,000
VII. Notes payable 500,000

Which of these would least likely require a year-end adjustment?

a. IV, VI and VII c. 1 and 111
b. II, IV, VI and VII d. all these require adjustments

PROBLEM 7: MULTIPLE CHOICE

1. Entity A's total expenses for 20x1 were P239,000 before possible adjustment for the
following:
i. Salaries already earned by employees but not yet paid, P22,000
ii. Entity A acquired a machine for P100,000 three years ago. The machine has a useful
life of 10 years. No depreciation has yet been recognized in the current year.
iii. Of the total accounts receivable balance of P120,000, 5% is estimated to be doubtful
of collection. The related allowance account has a zero balance.

How much is the adjusted total expenses?

a. 257,000 c. 283,000
b. 277,000 d. 291,000

2. Entity A's total income and total expenses for the year ended December 31, 20x1 were
P450,000 and P280,000, respectively, before possible adjustment for the following:
i. Unpaid utilities used during the period, P20,000
ii. The general ledger includes an "Unearned rent income" account with a balance of
P90,000. One-third of this amount is earned during the period.
iii. The general ledger shows "Prepaid insurance" of P12,000. However, the insurance
expires on December 31, 20x1.
iv. Entity A has a 12%, P500,000 note receivable dated September 30, 20x1. The
principal and interest on the note are due after one year.
How much is the adjusted profit (loss)?
a. 183,000 c. (53,000)
b. 207,000 d. (21,000)

3. The general ledger of Entity A shows a balance of P100,000 in the "Office supplies"
account. If unused supplies at year-end amount to P20,000, which of the following
statements is incorrect?
a. Entity A's balance sheet will show a current asset of P20,000 for office supplies.
b. Entity A's income statement will show supplies expense of P80,000.
c. The year-end adjusting entry involves a debit to "Supplies expense" for P80,000 and a
credit to "Office supplies” the same amount.
d. Entity A uses the method of initial recording of prepayments of expenses.

Use the following information for the next two questions:

Entity A provides bookkeeping services to Entity B for a monthly retainer fee (fixed monthly
fee) of P100,000. On December 1, 20x1. Entity A receives advanced fees of P300,000 covering
the months of December 20x1 to February 20x2.

4. If Entity A uses the liability method of initial recording advanced collections of income,
the year-end adjustment would include a
a. credit to service fees of P100,000.
b. credit to service fees of P200,000.
c. debit to unearned income of P200,000.
d. credit to unearned income of P200,000.

5. If Entity A uses the income method of initial recording of advanced collections of

income, the year-end adjustment would include a
a. debit to service fees of P100,000.
b. credit to service fees of P200,000
c. debit to unearned income of P200,000.
d. credit to unearned income of P200,000.

Use the following information for the next two questions:

Entity A prepays one-year insurance for P240,000 on September 1, 20x1.

6. If Entity A uses the asset method of initial recording of prepayments of expenses, the
year- end adjustment would include a
a. debit to prepaid insurance of P80,000.
b. credit to prepaid insurance of P80,000.
c. debit to insurance expense of P160,000.
d. credit to insurance expense of P160,000.

7. If Entity A uses the expense method of initial recording of prepayments of expenses, the
year-end adjustment would include a
a. debit to prepaid insurance of P80,000.
b. credit to prepaid insurance of P160,000.
c. debit to insurance expense of P80,000.
d. credit to insurance expense of P160,000.

Use the following information for the next two questions:

The unadjusted trial balance of Entity A shows the following:

Accounts receivable 280,000

Allowance for bad debts
Equipment 360,000
Accumulated depreciation 144,000

Additional information:

 3% of the total accounts receivable are doubtful of collection.

 The equipment was acquired 2 years ago and was estimated have a 5-year useful life.

8. What is the adjusted (net) carrying amount of receivable to be presented in the year-end
statement accounts financial position?
a. 271,600 c. 280,000
b. 288,400 d. 276,100

9. What is the adjusted (net) carrying amount of equipment to be presented in the year-end
statement of financial position?
a. 360,000 C. 144,000
b. 216,000 d. 72,000

10. Entity A's profit for 20x1 was P360,000 before possible adjustment for the following:
i. Entity A issued a 16%, P300,000 note payable on July 31, 20x1. The principal and interest on
the note are due after one year.
ii. The general ledger includes a "Rent income" account a balance of P90,000. One-third of this
amount is earned during the period.
iii. The general ledger includes a "Supplies expense" account with a balance of P60,000. The
year-end physical count revealed that one-fourth is unused.
iv. Entity A collected advanced retainer fees of P40,000 on December 1, 20x1. The amount
collected covers months of December 20x1 and January 20x2. Entity A uses the income method.

How much is the adjusted profit(loss)?

a. 315,000 c. 245,000
b. 275,000 d. 435,000