ADJUSTING ENTRIES AND PROMISSORY NOTES

I.IDENTIFICATION:

Accrued Expense 1. An expense that is already incurred by the business but not
yet paid when the accounting period ends.
Assets and Liabilities 2. Refers to income and expense accounts.
Net realizable value 3. The difference between Accounts Receivable and the
related
allowance for doubtful accounts.
Real Account 4. Refers to balance sheet accounts.
Net book value 5. The difference between cost of asset and its related valuation
account.
Periodicity assumption 6. Another term for Time-period assumption.
Adjusting entry 7. An entry that splits the nominal and real accounts from a
mixed account.
Mixed Account 8. An account which contains both nominal and real accounts.
Prepaid expenses 9. An expense that is already paid but not yet incurred.
Accrued income 10. An income that is already earned but not yet received or
collected.
Depreciation expense 11. An expired cost of a fixed asset that is charged to
expense.
Matching principle 12. Combined principle of revenue and expense recognition.
Pre-collected income 13. An income that is already received but not yet earned.
Cut-off period 14. Segregation of all elements or accounts belonging to a
particular date only.
Account Expense 15. Provision for doubtful accounts without passing the
allowance for doubtful accounts.
Principal 16. Refers to the face value of the note.
Maker of the Promissory Note 17. A person or business entity who makes the
promissory note
and makes payment of the said note as it falls due.
Interest 18. Refers to the charge for a borrowed money.
Beneficiary / Payee of the Promissory Note 19. A person or business entity to
whom the promise is given
and receive the payment of the said note as it falls due.
Maturity Value 20. Refers to the total amount due upon its maturity date which
comprise of the principal amount and the interest earned.
II. Determine the maturity date , interest and maturity value of the following
notes. ( Date of issue: August 1, 2020)

Maturity date Interest Maturity value

1.A P70,000, 6 ¾% , 60-day note Sep 30, 2020 787.50 70,787.50

2.A P50,000, 5 ¼%, 90-day note Oct 31, 2020 656.25 50,656.25

3. A P200,000, 8 ½%, 120-day note Nov 30, 2020 5,666.67 205,666.67

III.
A. From the following independent adjustment items at calendar year-end
(2020), present adjusting journal entries. Show computations in good form.
( Use account titles which you think are appropriate under the
circumstances.)

1. Accrued interest on notes:

Note to a supplier, 12%, 90-day, dated November 1, 2020,

P150,000.

Note from a customer, 6%, 120-day, dated October 1, 2020,

P200,000

I = ( 150,000 ) (.12) (90/360) = 4500 / 3 mos. = 1500 / mo.

Adjusting Entry
Dec. 31, 2020 Accrued Interest Expense P 3,000
Interest Expense P 3,000

I = ( 150,000 ) (.06) (120/360) = 3000 / 4 mos. = 750 / mo.

Adjusting Entry
Dec. 31, 2020 Accrued Interest Income P 2,250
Interest Income P 2,250
  

2. A collection of P80,000 from a client was previously credited to

Unearned Service Income. ½ of the collection is estimated to have
been earned.

Adjusting Entry
 Dec. 31, 2020 Service Income P 40,000
Unearned Service Income P 40,000

3. A cash drawing of P20,000 by the owner, Dr. Pilapil was erroneously

debited to Salaries Expense.
Adjusting Entry
Dec. 31, 2020   Drawing Account P 20,000
Cash P 20,000

4. A payment for telephone bills of P1,895 was erroneously recorded as

follows: Utilities Expense 1,985
Cash 1,985
Adjusting Entry
Utilities Expense 1,895
Cash 1,895

5. Unused office supplies – P1,475. The original amount was P2,000.

Adjusting Entry
  Office Supplies Expense       1,475
Unused Office Supplies         1,475

6. The company drew a one year insurance policy on its building on May 1,
2020, the entry being: Insurance Expense 15,000
Cash 15,000
 15,000 / 12 mos. = 1250 / mo.
                     May 1, 2020 – Dec. 31, 2020  = 8  months (expense portion)
8 months  x  1,250 = 10,000 expense portion

Jan. 1, 2020 – May. 1, 2020 = 4 months ( asset portion )

4 months x 1,250 = 5,000 (asset portion)
COMPARATIVE  JOURNAL ENTRIES
EXPENSE METHOD ASSET METHOD 
 (Nominal Approach )   (Real Approach)

UPON Insurance Expense  15,000 Prepaid Insurance    15,000

PAYMENT      Cash                                   Cash                           15,000
May. 1, 15,000        To record insurance premium
2020       To record insurance         paid.
       premium paid.

Adjusting Prepaid Insurance  5,000 Insurance Expense    10,000

Entry      Insurance  Expense    5,000     Prepaid Insurance        10,000        
Dec.31,2020          To record the unexpired To record the expired 
         ( asset) portion of          (expense) portion of insurance
         insurance premium.          premium.

7. The following property and equipment were on the records of the

enterprise:
Scrap Estimated Date
Cost Value Life Acquired

Store Equipment P150,000 P 5,000 5 years 4/01/2020

Office Equipment 140,000 10,000 10 years 6/01/2019
Furnitures 60,000 8,000 4 years 10/01/2020

Depreciation expense = 100,000 – 10,000 / 5 years = 18,000/year x 5/12 =P 7,500

Adjusting Entry
Dec. 31, 2020
Depreciation Expense – Store Equipment P 12,083.33
Accumulated Depreciation – Store Equipment P 12,083.33

Depreciation Expense – Office Equipment P 10,833.33

Accumulated Depreciation – Office Equipment P 12,083.33

Depreciation Expense – Furniture P 4,333.33

Accumulated Depreciation – Furniture P 4,333.33

8. The business has an outstanding Accounts Receivable of P200,000 and

has already provided an Allowance for Doubtful Accounts in the amount
of P10,000. The Allowance for Doubtful Accounts should be increased
by P 10,000.

Adjusting entry:
Bad Debts 10,000
Allowance for Bad Debts 10,000

9. Salaries of employees were unpaid, P 26,000.

Adjusting Entry
Dec. 31, 2020   Salaries Expense P 26,000
Accrued Salaries Expense P 26,000
To record unpaid salary of an employee.
 10.Rental collection was received in advance, P18,400. An income account
was credited. At the end of the period, P2,400 is not yet earned

COMPARATIVE JOURNAL ENTRIES

Expense Method Asset Method

Upon Payment Rent Expense          3,000 Prepaid Rent         3,000

Nov. 1, 20A      Cash                           3,000        Cash                         3,000
      To record rent expense         To record rent expense
paid. paid.

Adjusting Entry Prepaid Rent            1,000 Rent Expense       2,000

Dec. 31, 20A       Rent Expense            1,000          Prepaid Rent         2,000
      To record the unexpired          To record the expired 
       portion of the rent paid.           portion of the rent paid.

11. Paid an insurance premium amounting to P20,000. Asset method was

used. At the end of the period, P4,000 has actually expired.

ASSET METHOD 
 (Real Approach)

Prepaid Insurance    20,000

       Cash                           20,000
       To record insurance premium
        paid.

Insurance Expense    16,000

    Prepaid Insurance        16,000        
To record the expired 
        (expense) portion of insurance
         premium.

12.An interest on Notes Receivable was received in advance in the amount

of P4,200. Liability account was credited. At the end of the period,
P1,200 is actually earned.
13.A purchase of supplies was debited to an expense account, P6,800.
P1,400 cost of supplies were actually on hand when the period ended.

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14.An interest that has been accrued from customer’s borrowed money,
P15,000.

15.The business showed in part the Accounts Receivable and its related
Allowance for Doubtful Accounts as follows:
DR. CR.

Accounts Receivable 150,00

Allowance for Doubtful Accounts 15,000

The provision for doubtful accounts should be increased to 12% of the

outstanding accounts receivable balance.

16.Cash received from customer for services rendered was not recorded in
the book. This is covered by Cash Invoice No. 0145 dated December 31,
2020 in the amount of P8,000.