Accounting Principles

Module 4 – Adjusting Entries

Exercise 4-1

Quick Company paid P 25,920 premium on a three-year insurance policy on September 1, The effectivity of the policy
begins on September 1, 2019.
1. Assuming the cash basis of accounting, how much of the premium will appear as an expense on the annual
statement of comprehensive income for year 2019? For 2020? For 2021? For 2022?
2. Assuming the cash basis, how much of the premium will appear as an asset on each December 31 statement of
financial position for the year 2019? For 2020? For 2021? For 2022?
3. Assuming the accrual basis of accounting, how much of the premium will appear as an expense on the annual
statement of comprehensive income for the year 2019? For 2020? For 2021? For 2022?
4. Assuming the accrual basis, how much of the premium will appear as an asset on each December 31 statement of
financial position for the year 2016? For 2017? For 2018? For 2019?

2019 2020 2021 2022

1. ₱25,920 ₱0 ₱0 ₱0

2. ₱0 ₱0 ₱0 ₱0

3. ₱2,880 ₱8,640 ₱8,640 ₱5,760

4. ₱23,040 ₱14,400 ₱5,760 ₱0

Exercise 4-2
Determine the amounts indicated by question marks in the columns below. Consider each column a separate problem.
Make the adjusting entry for column (a) assuming supplies purchased are debited to an asset account.

(a) (b) (c) (d)

Supplies on hand, August 1 ₱264 ₱434 ₱196 (?)

Supplies purchased during the month 52 (?) 174 1,928
Supplies consumed during the month 194 972 (?) 1,632
Supplies remaining on August 31 (?) 436 56 1,188

a) 264 + 52 – 194 = ₱122

b) (972 + 436) – 434 = ₱974
c) 434 + 972 + 436 = ₱1,842
d) 196 + 174 – 56 = ₱314
e) (1,632 + 1,188) – 1,938 = ₱892
Exercise 4-3
Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue (unearned revenue), (c)
accrued expense (accrued liability), or (d) accrued revenue (accrued asset). Use CAPITAL LETTERS.

ANSWERS:

1. A two-year premium paid on a fire insurance policy A

2. Electric bill owed but not yet paid C
3. Office Supplies on hand C
4. Wages owed but not yet paid C
5. Telephone bill owed but payable in the following period C
6. Subscriptions collected in advance by a newspaper publisher B
7. Service Revenue collected but not yet earned B
8. Service Revenue already earned but not yet received D
9. Interest paid in advance from a bank loan A
10. Rent received in advance B
11. Services rendered but not yet collected D
12. Advertising contract paid in advance for one year A
13. Income collected but not yet earned D
14. Rent paid in advance A
15. Interest collected in advance by the creditor A

Exercise 4-4
The Supplies and Supplies Expense accounts at December 31, after adjusting entries have been posted at the end of the
first year of operations, are shown in the T-accounts below:

Supplies Supplies expense

Bal. 2,090 Bal. 9,715

Determine the amount of supplies purchased during the year. 11,805

Exercise 4-5

At the end of the current year, P 21,780 of fees had been earned but had not been billed to clients.
a) Journalize the adjusting entry to record the accrued fees.

DESCRIPTION P/R DEBIT CREDIT

2020
Dec. 31 Accounts receivable 21,780
Unearned revenue 21,780
To record uncollected revenue for the year

b. If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary? Explain.
If the cash method was used, it is not necessary to adjust the entry anymore since under this method (cash
method) we only record income/revenue when the payment is received and expense is considered incurred only when
paid in cash.
Exercise 4-7

Prepare the adjusting entries on December 31, 2019, the end of the annual accounting period, on the following
independent data. Show your computations after each entry.
1. The Insurance Expense account had a debit balance on December 31, 2019 of P 36,000 representing premium for
a 2-year fire insurance policy effective October 1, 2019.
2. Rent Income was credited for P 18,000 on November 1, 2019 representing nine months’ rent collected in advance.
3. Equipment per general ledger on December 31, 2019 shows a balance of P 372,000. Equipment acquired during
the year was P 52,000 on April 1, 2019. All equipment is to be depreciated at the rate of 25% per annum.
4. As of December 31, 2019, commissions already earned but not yet collected amounted to P 48,000.
5. Office Supplies costing P 9,000 bought during the period was debited to the Office Supplies account. Of the
amount, P 5,000 were consumed during the year.
6. Unearned Service Fees account showed a credit balance of P 80,000 per general ledger on December 31. Of this,
40% had been actually earned during the period.
7. On December 31, 2019, a 90-day, 9% Notes Payable has a balance of P 120,000 per general ledger. The note was
issued on December 5, 2019. No interest has been taken on this note.
8. Unearned service revenue has a balance of P 400,000 of which 60% has been earned.
9. Notes Receivable has a balance of P 100,000 received from a client in settlement of an open account on November
16, 2019. The note is a 90-day, 12% note. No interest has been taken on this note.
10. The Prepaid Insurance account has balance of P 210,000 on December 31, 2019. The balance represented two fire
insurance policies acquired during 2019. The first policy, Policy I for P 120,000 was acquired on March 1, 2019 and
the second policy, Policy II was acquired on August 1, 2019 for P 90,000. Policy I is payment for a 2-year plan while
Policy II is for a one-year plan.

DATE DESCRIPTION P/R DEBIT CREDIT

2019
Dec. 31 1. Prepaid insurance 31,500
Insurance expense 31,500
To record payment of insurance
3
36,000 𝑥 24 = 4,500
36,000 − 4,500 = 𝟑𝟏, 𝟓𝟎𝟎

2. Rent income 14,000

Unearned rent income 14,000
To record payment for rent

18,000
= ₱2,000 𝑟𝑒𝑛𝑡 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ;
9 𝑚𝑜𝑛𝑡ℎ𝑠

𝑁𝑜𝑣. 1 − 𝑁𝑜𝑣. 31 = ₱2,000

𝐷𝑒𝑐. 1 − 𝐷𝑒𝑐. 31 = ₱2,000
—————
₱4,000
18,000 – 4,000 = ₱14,000

3. Depreciation expense — Equipment 102,750

Accumulate depreciation — Equipment 102,750
To record the depreciation expense
 9
(372,000 𝑥 0.25) + (52,000 𝑥 0.25 𝑥 )
12
= 93,000 + 9, 750
= 𝟏𝟎𝟐, 𝟕𝟓𝟎

4. Commission Receivable 48,000

Commission Income 48,000
To record commission

5. Office supplies expense 5,000

Office supplies 5,000
To record office supplies expenses

6. Unearned service fee 32,000

Service fee 32,000
To record service fee
80,000 𝑥 0.40 = 𝟑𝟐, 𝟎𝟎𝟎

7. Interest expense 3,120

Interest payable 3,120
To record interest
26
120,000 𝑥 0.09 𝑥 = 𝟑, 𝟏𝟐𝟎
90

8. Unearned service revenue 240,000

Service revenue 240,000
To record payment for the service
400,000 𝑥 0.60 = 𝟐𝟒𝟎, 𝟎𝟎𝟎

9. Interest receivable 6,000

Interest income 6,000
To record interest
45
100,000 𝑥 0.12 𝑥 = 𝟔, 𝟎𝟎𝟎
90

10. Prepaid insurance expense 87,500

Prepaid insurance 87,500
To record the expired cost
10
I. 120,000 𝑥 24 = 50,000
5
II. 90,000 𝑥 12 = 37,500

50,000 + 37,500 = 𝟖𝟕, 𝟓𝟎𝟎

Exercise 4-8 Classification of Adjusting Entries

INSTRUCTION: Classify the following transaction as:

a. Accrued revenue c. Prepaid expenses
b. Accrued expense d. Unearned revenue
ANSWER
 1. Interest paid in advance at the time the note was discounted at the bank. C
2. Property taxes paid in advance. C
3. Commission income received in advance. D
4. Rent received in advance in property owned. D
5. Life insurance premiums received by an Insurance company. C
6. Supplies on hand. C
7. Unpaid salaries to employees. B
8. Portion of fee earned by CPA but not due until completion of an audit. A
9. Interest earned but not yet received. A
10. Taxes owed but payable in the following month. B
11. Subscription collected in advance by a publisher. D
12. Receipts from sale of meal tickets by a restaurant. A
13. Interest owed but not yet due. B
14. A three-year premium paid on fire insurance policy. C
15. Salary owed but not yet due. B
16. Uncollected service income. A
17. Accrued interest on notes payable. B
18. Paid advertising expenses for the quarter. C
19. Collected two months deposit and one month advance on rental of apartment. D
20. Unrecorded interest on notes receivable. B

Exercise 4-9 Preparation of Adjusting Entries

INSTRUCTION: Only one-half of each adjusting entry has been shown in a journal form. Complete the journal entry.

2020
November
1. Interest Income is credited.
Interest receivable is debited.

2. Doubtful account expense is debited.

Allowance for doubtful accounts is credited.

3. Commission income is debited

Unearned Commission income is credited.

4. Accumulated depreciation is credited.

Depreciation expense is debited.

5. Utilities expense is debited.

Utilities payable is credited.

6. Service income is credited. (Accrued income)

Accounts receivable is debited.

7. Prepaid rent is credited.

Rent expense is debited.

8. Rent receivable is debited.

Rent income is credited.

9. Office supplies are debited.

Office supplies expense are credited.
10. Allowance for doubtful accounts is debited.
Doubtful accounts expense is credited.

11. Salaries payable is credited.

Salary expense is debited.

12. Unearned rent is debited.

Rent income is credited.

13. Depreciation expense is debited.

Accumulated depreciation is credited.

14. Wages expense is debited.

Wages payable is credited.

15. Prepaid insurance is credited.

Insurance expense is debited.

16. Interest expense is debited.

Interest payable is credited.

17. Interest receivable is debited.

Interest revenue is credited.

18. Unearned commission is credited.

Commission income is debited.

19. Rent expense is credited.

Prepaid rent is debited.

20. Unearned interest is credited.

Interest income is debited.