Activity 7

Adjusting Entries and Accounting Policy

The following are some of the transactions made by Mr. Clean Services during
2019:

Apr. 1 Acquired cleaning supplies in the amount of P160,000. A count of

the supplies on Dec. 31, 2019 amounted to P110,000.
P160,000
P110,000 (ASSET)
P160,000 –P110,000 = P50,000 (EXPENSE)

ASSET METHOD
April 1 Cleaning Supplies 160,000
Cash 160,000

Adjusting Entry:
Dec 31 Cleaning Supplies Expense 50,000
Cleaning Supplies 50,000

Cleaning Supplies Cleaning Supplies Expense

April 1 160,000 Dec 31 50,000 Dec 31 50,000
110,000

EXPENSE METHOD
April 1 Cleaning Supplies Expense 160,000
Cash 160,000
Adjusting Entry:
Dec 31 Cleaning Supplies 110,000
Cleaning Supplies Expense 110,000

Cleaning Supplies Cleaning Supplies Expense

Dec 31 110,000 Apr 1 160,000 Dec 31 110,000
50,000
Aug. 1 Received P180,000 from Producers Bank for cleaning janitorial
uniforms over the next 3 years.

P180,000/3 years = P60,000 per year

P60,000/12 mos = P5,000 per month

Aug 1 – Dec 31 = 5 mos x P5,000 = P25,000 (INCOME)

OR P180,000 x 5/36 = P25,000

31 mos x P5,000 = P155,000 (LIABILITY)

LIABILITY METHOD
Aug 1 Cash 180,000
Unearned Cleaning Revenues 180,000
Adjusting Entry:
Dec 31 Unearned Cleaning Revenues 25,000
Cleaning Revenues 25,000

Unearned Cleaning Revenues Cleaning Revenues

Dec 31 25,000 Aug 1 180,000 Dec 31 25,000
155,00

INCOME METHOD
Aug 1 Cash 180,000
Cleaning Revenues 180,000
Adjusting Entries:
Dec 31 Cleaning Revenues 155,000
Unearned Cleaning Revenues 155,000

Cleaning Revenues Unearned Cleaning Revenues

Dec 31 155,000 Aug 1 180,000 Dec 31 155,000
25,000

Nov. 1 Paid P360,000 for annual rent.

P360,000 / 12 mos = P30,000 per month
2 mos x P30,000 = P60,000 (EXPENSE) or P360,000 x 2/12
10 mos x P30,000= P300,000 (ASSET) or P360,000 x 10/12 or P360,000-P60,000
ASSET METHOD
Nov 1 Prepaid Rent 360,000
Cash 360,000
Adjusting Entry:
Dec 31 Rent Expense (IS) 60,000
Prepaid Rent (BS) 60,000

EXPENSE METHOD
Nov 1 Rent Expense
Cash
Adjusting Entry:
Dec 31 Prepaid Rent 300,000
Rent Expense 300,000

Required:
1. Assume that Mr. Clean Services records these transactions using the following accounts,
record the adjusting entries on Dec. 31, 2019:
Cleaning Supplies ASSET
Prepaid Rent ASSET
Unearned Cleaning Revenues LIABILITY
2. Now, assume that Mr. Clean Services records these transactions using the following
accounts, what will be the adjusting entries on Dec. 31, 2019?
Cleaning Supplies Expense EXPENSE
Rent Expense EXPENSE
Cleaning Revenues INCOME
Activity 9
Preparing Adjusting Entries

Prepare the adjusting entry for each of the following for the year ending Dec. 31,
2020:
Deferred Expense
a. Paid P24,000 for a 1-year fire insurance policy to commence on Sept. 1. The
amount of premium was debited to Prepaid Insurance. 24,000
Adjusting Entry:
Dec 31 Insurance Expense 8,000
Prepaid Insurance 8,000
24,000 x 4/12 =8,000
24,000/12 x 4mos = 8,000

EXPENSE METHOD
Dec 31 Prepaid Insurance 16,000
Insurance Expense 16,000

Accrual of Expense
b. Borrowed P200,000 by issuing a 1-year note with 7% annual interest to ISU
Credit Cooperative on Oct. 1, 2020.

I (interest) = P (principal) x r (rate of interest) x T (time)

= P200,000 x .07 x 3/12
= P3,500

Adjusting Entry:
2020
Dec 31 Interest Expense 3,500
Interest Payable 3,500

2021
Oct 1 Interest Expense 10,500
Interest Payable 3,500
Notes Payable 200,000
Cash 214,000
P200,000 x .07 x 9//12 = P10,500
 c. Paid P260,000 cash to purchase a delivery van (surplus) on Jan. 1. The van
was expected to have a 3-year life and a P10,000 salvage value. Depreciation
is computed on a straight-line basis.

Adjusting Entry:
Dec 31 Depreciation Expense-Delivery Van 83,333
Accumulated Depn-Delivery Van 83,333

P260,000-P10,000=P250,000 ÷ 3 years = 83,333

Deferred Income
d. Received an P30,000 cash advance for a contract to provide services in the
future. The contract required a 1-year commitment, starting April 1.

P30,000 ÷ 12 = 2,500 x 9 mos = P22,500 (INCOME)

Adjusting Entry:
Dec 31 Unearned Service Revenues 22,500
Service Revenues 22,500

INCOME METHOD
Dec 31 Service Revenues 7,500
Unearned Service Revenues 7,500

e. Purchased P64,000 of supplies on account. At year's end, P8,000 of supplies

remained on hand.

Adjusting Entry:
Dec 31 Supplies Expense 56,000
Supplies 56,000

EXPENSE METHOD
Supplies 8,000
Supplies Expense 8,000
 Accrual of Revenue

f. Invested P100,000 cash in a certificate of deposit that paid 4% annual

interest. The certificate was acquired on May 1 and carried a 1-year term to
maturity.

P100,000 x .04 x 8/12 = P2,667

Adjusting Entry:
Dec 31 Interest Receivable 2,667
Interest Income 2,667

g. Paid P90,000 cash in advance on Sept. 1 for a 1-year lease on office space.

P90,000 x 4/12 = P30,000 (EXPENSE)

P90,000 x 8/12 = P60,000 (ASSET)

Adjusting Entry:
Dec 31 Rent Expense 30,000
Prepaid Rent 30,000

EXPENSE METHOD
Prepaid Rent 60,000
Rent Expense 60,000