ADJUSTING JOURNAL ENTRIES

Prepare the adjusting journal entries and determine the adjusted balances of the
accounts based on the information given below:
1. Depreciation
The company purchased an equipment for P250,000 on July 1, 2011.

The company estimated that the equipment will have a useful life of 5
years and a salvage value of P5,000. It is the company's policy to
depreciate the equipment on a straight-line basis.
BEFORE ADJUSTMENT AFTER If you failed to record depreciation expe
Equipment 250,000 250,000 Revenues No Effect
Accumulated Depc'n 0 24,500 24,500 Expenses Understated
Carrying value 250,000 225,500 Net Incom Overstated
Assets Overstated
Depreciation Expense 0 24,500 24,500 Liabilities No Effect
Equity Overstated
Adjusting Journal Entry: Dr Cr
Depreciation Expense 24,500 Beg Cap
Accumulated Depreciation 24,500 Investment
(Withdrawals)
2. Bad Debts Net Income

The company estimates that 2% of accounts receivable will prove to

be uncollectible. End Cap
BEFORE ADJUSTMENT AFTER
Accounts Receivable 300,000 300,000 failure to adjust or record bad debts?
Allowance for Bad Debts 4,500 1,500 6000 Revenues No Effect
Net Realizable Value 295,500 294,000 Expenses Understated
Net Incom Overstated
Bad Debts Expense 0 1,500 1,500 Assets Overstated
Liabilities No Effect
Adjusting Journal Entry: Dr Cr Equity Overstated
Bad Debts Expense 1,500
Allowance for Bad Debts 1,500

3. Accrued Expenses
***Accrued expenses are expenses already incurred but not yet paid.
Received a bill from Meralco on January 3, 2012 for the
December 2011 energy consumption, P3,000.
BEFORE ADJUSTMENT AFTER Revenues No Effect
Utilities Payable 0 3,000 3,000 Expenses Understated
Utilities Expense 29,700 3,000 32,700 Net Incom Overstated
Assets No Effect
Adjusting Journal Entry: Dr Cr Liabilities Understated
Utilities Expense 3,000 Equity Overstated
Utilities Payable 3,000 A = L + E
NE = U + O
4. Accrued Revenues
 ***Accrued revenues are revenues already earned but not yet received.
The company sublet its office for a P2,500 monthly rental to be paid
on the 5th day of the following month.
BEFORE ADJUSTMENT AFTER Revenues Understated
Rent Receivable 0 2,500 2,500 Expenses No Effect
Rent Income 27,500 2,500 30,000 Net Incom Understated
Assets Understated
Adjusting Journal Entry: Dr Cr Liabilities No Effect
Rent Receivable 2,500 Equity Understated
Rent Income 2,500
A=L+E
5. Prepaid Expenses U = NE + U
***Prepaid Expenses are expenses already paid but not yet incurred.
The company paid a 1-year insurance of P12,000 on May 1, 2011.
BEFORE ADJUSTMENT AFTER Revenue NE
Prepaid Insurance 12,000 -8,000 4,000 Expense Understated
asset method

Insurance Expense 0 8,000 8,000 Net Incom Overstated

Assets Overstated
Adjusting Journal Entry: Dr Cr Liabilities NE
Insurance Expense 8,000 Equity Overstated
Prepaid Insurance 8,000

What if?
BEFORE ADJUSTMENT AFTER Revenue NE
Prepaid Insurance 0 4,000 4,000 Expense Overstated
expense method

Insurance Expense 12,000 -4,000 8,000 Net Incom Understated

Assets Understated
Adjusting Journal Entry: Dr Cr Liabilities NE
Prepaid Insurance 4,000 Equity Understated
Insurance Expense 4,000

6. Unearned Revenues
***Unearned revenues are revenues already received but not yet earned.
The company received advance rental payment for 6 months of
P36,000 on September 1, 2011.
BEFORE ADJUSTMENT AFTER Revenue U
Unearned Rent Income 36,000 -24000 12,000 Expense NE
liability method

Rent Income 0 24,000 24,000 Net Incom U

Assets NE
Adjusting Journal Entry: Dr Cr Liabilities O
Unearned Rent Income 24,000 Equity U
Rent Income 24,000

What if?
BEFORE ADJUSTMENT AFTER Revenue O
Unearned Rent Income 0 12,000 12,000 Expense NE
revenue method

Rent Income 36,000 -12000 24,000 Net Incom O

Assets NE
 revenue method
Adjusting Journal Entry: Dr Cr Liabilities U
Rent Income 12,000 Equity O
Unearned Rent Income 12,000

Setting up the merchandise inventory:

Merchandise Inventory, Beg ----- part of cost of goods sold
Merchandise Inventory, End xxx ----- asset, current asset
Income and Expense Summary xxx ---- represents merchandise inventory end in the c

Merchandise Inventory, January 1, 2018

Merchandise Inventory, December 31, 201 xxx
Income and Expense Summary xxx

If you failed to set up merchandise inventory end

Revenues No Effect
Cost of Goods Sold Overstated
Gross Profit Understated
Net Income Understated
Assets Understated
Liabilities No Effect
Equity Understated
ed to record depreciation expense?

Understated
Overstated
Overstated

Overstated A=L+E
O = NE + ?
O = Ne + O
O=O

adjust or record bad debts?

Understated
Overstated
Overstated

Overstated

Understated
Overstated

Understated
Overstated
Understated

Understated
Understated

Understated

Understated
Overstated
Overstated

Overstated

Overstated
Understated
Understated

Understated
handise inventory end in the cost of goods sold computation in the worksheet
BAD DEBTS EXPENSE
METHODS OF DETERMINING BAD DEBTS
1. % OF SALES
2. % OF ACCOUNTS RECEIVABLE
3. AGING OF ACCOUNTS RECEIVABLE

% OF SALES
SALES OR NET SALES OR CREDIT SALES OR NET CREDIT SALES
X % UNCOLLECTIBLE
= BAD DEBTS EXPENSE

% OF ACCOUNTS RECEIVABLE
A/R
X % UNCOLLECTIBLE
= REQUIRED BALANCE OF ALLOWANCE FOR BAD DEBTS
- CREDIT BALANCE OF ALLOWANCE
+ DEBIT BALANCE OF ALLOWANCE
= BAD DEBTS EXPENSE

AGING OF AR
SAME FORMULA WITH % OF ACCOUNTS RECEIVABLE, HOWEVER, % VARIES DEPENDING
ON THE AGE OF A/R

HOW AGE OF AR IS DETERMINED?

BASED ON THE CREDIT TERMS.
EXAMPLE: ON SEPT 2, 2018, THE COMPANY SOLD MERCHANDISE FOR P100,000
WITH TERMS 2/10, N/30. AT DECEMBER 31, 2018 THIS RECEIVABLE IS STILL OUTSTANDING.
WHAT IS THE AGE OF THIS RECEIVABLE.

SEP 30 DAYS
LESS DATE OF SALE 2
BALANCE 28
OCT 31
NOV 30
DEC 31
TOTAL 120
LESS CREDIT TERMS 30
AGE OF A/R 90 DAYS PAST DUE
PAGE 317; EXERCISE 1
1. BAD DEBTS IS 1% OF GROSS SALES
GROSS SALES 1,200,000
X % UNCOLLECTIBLE 1%
BAD DEBTS EXPENSE 12000

BAD DEBTS EXPENSE 12000

ALLOWANCE FOR BAD DEBTS 12000

ACCOUNTS RECEIVABLE 125,000

LESS: ALLOWANCE FOR BAD DEBTS 14,000 (2,000 + 12,000)
NET REALIZABLE VALUE 111,000

2. BASED ON NET SALES

SALES 1,200,000
SRA -10,000
SALES DISCOUNTS -20,000
NET SALES 1,170,000
X % UNCOLLECTIBLE 1%
BAD DEBTS EXPENSE 11700

BAD DEBTS EXPENSE 11700

ALLOWANCE FOR BAD DEBTS 11700

ACCOUNTS RECEIVABLE 125,000

LESS: ALLOWANCE FOR BAD DEBTS 13,700 (2,000 + 11,700)
NET REALIZABLE VALUE 111,300

3. BASED ON A/R: INCREASED BY

ACCOUNTS RECEIVABLE 125,000
X % UNCOLLECTIBLE 1%
INCREASE IN ALLOWANCE FOR BAD DEBTS/BDE 1250

BAD DEBTS EXPENSE 1250

ALLOWANCE FOR BAD DEBTS 1250

ACCOUNTS RECEIVABLE 125,000

LESS: ALLOWANCE FOR BAD DEBTS 3,250 (2,000 + 1,250)
NET REALIZABLE VALUE 121,750

4. BASED ON A/R: INCREASED TO

ACCOUNTS RECEIVABLE 125,000
X 2%
REQUIRED BALANCE OF ALLOWANCE FOR BAD DEBTS 2500
- CREDIT BALANCE OF ALLOWANCE FOR BAD DEBTS 2,000
+ DEBIT BALANCE OF ALLOWANCE FOR BAD DEBTS
BAD DEBTS EXPENSE 500

#2 PAGE 318

%
UNCOLLE
AGE AMOUNT CTIBLE
NOT YET DUE 60,000 0% 0
1-30 DAYS PAST DUE 150,000 2% 3000
31-60 DPD 70,000 5% 3500
61-90 DPD 50,000 25% 12500
OVER 90 DPD 30,000 50% 15000
360,000 34000

REQUIRED BALANCE OF ALLOWANCE 34000

LESS: CREDIT BALANCE OF ALLOWANCE 20,000
BAD DEBTS EXPENSE 14,000

BAD DEBTS EXPENSE 14,000

ALLOWANCE FOR BAD DEBTS 14,000

EXERCISE 1: PAGE 317

#5
REQUIRED BALANCE OF ALLOWANCE 2,250
LESS: CREDIT BALANCE OF ALLOWANCE 2,000
BAD DEBTS EXPENSE 250

BAD DEBTS EXPENSE 250

ALLOWANCE FOR BAD DEBTS 250