Adjusting Process s

FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

Handout – Adjusting Process

1. Types of Adjustments
a. Deferrals (Prepayments)  Accrued expenses
 Prepaid expenses (Asset or Expense)  Accrued income
 Unearned income (Liability or Revenue) c. Depreciation
b. Accruals d. Doubtful accounts

2. Deferrals (Prepayments)
a. Prepaid Expenses [Asset Method]
(1) Supplies
Neat’s Print Shop purchased advertising supplies costing P50,000 on October 5. Neat’s Print Shop debited the asset
Supplies. This account shows a balance of P50,000 in the October 31 trial balance. An inventory count at the close of
business on October 31 reveals that P20,000 of supplies are still on hand.
Questions:
a. What was the initial entry of Neat’s Print Shop on (c.2) October profit
October 5 related to purchase of Supplies? (c.3) October 31 assets
b. How much supplies were used during October? (c.4) October 31 owner’s equity
c. Without any adjustments, what would the effect d. What should be the adjusting entry of Neat’s Print
on the following items in the financial statements Shop by October 31 to reflect the consumption of
(overstated, understated or correctly stated): supplies?
(c.1) October expenses
(2) Insurance
On July 4, Maiden Piggery paid P48,000 for a one-year fire insurance policy, beginning immediately. Maiden debited
the cost of the premium to a real account at that time. This account still shows a balance of P48,000 in the July 31
trial balance.
Questions:
a. What was the initial entry of Maiden Piggery on (c.1) July expenses
July 4 for the payment of premium to the policy (c.2) July profit
provider? (c.3) July 31 assets
b. How much premium expired during July? (c.4) July 31 owner’s equity
c. Without any adjustments, what would the effect d. What should be the adjusting entry of Maiden
on the following items in the financial statements Piggery by July 31 to reflect the use of the
(overstated, understated or correctly stated): premium?
(3) Rent
On March 1, 2015, Quijonez Fashion Boutique paid P240,000 for a 24-month rent in advance for the use of a stall in
a flea market. Quijonez recorded the amount paid in a permanent account. On December 31, 2015 trial balance, the
permanent account still shows P240,000 balance related to the rent paid last March 1.
Questions:
a. What was the initial entry of Quijonez Fashion (c.1) 2015 expenses
Boutique Concepts on March 1 related to the (c.2) 2015 profit
advance payment made to stall owners? (c.3) December 31 assets
b. How much rent payments were consumed during (c.4) December 31 owner’s equity
the year? d. What should be the adjusting entry of Quijonez
c. Without any adjustments, what would the effect Fashion Boutique by December 31 to reflect the
on the following items in the financial statements rent payments consumed?
(overstated, understated or correctly stated):

b. Unearned Income [Liability Method]

(1) Case 1
On April 1, Nova Solutions, a consulting business, received P1,000,000 advance payments from its clients for
services to be performed in the future. Nova Solutions recorded the same in the liability account ‘Unearned Fees.’ By
the end of April, Nova Solutions fulfilled 40% of the required work based on the contract with its clients. On April 30
trial balance, the liability account Unearned Fees still show P1,000,000 balance. Based on Nova Solutions’ Chart of
Accounts, the business uses Fees Earned to record revenues.
Questions:
a. What was the initial entry of Nova Solutions on (c.1) April revenues
April 1 upon receipt of advance payments from its (c.2) April profit
clients? (c.3) December 31 liabilities
b. How much fees were earned during April? (c.4) December 31 owner’s equity
c. Without any adjustments, what would the effect d. What should be the adjusting entry of Nova
on the following items in the financial statements Solutions by April 30 to reflect the fees already
(overstated, understated or correctly stated): earned?
(2) Case 2
On December 1, LR Advertising Concepts received P120,000 payments in advance for advertising a local product in
one of the billboards it owns for six months starting December 1. On December 31, trial balance, LR Advertising
Concepts shows the following partial trial balance:

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LR Advertising Concepts
Trial Balance
December
Account Account Title (Dr.) (Cr.)
No.
101 Cash P 348,000
… … …
… … …
110 Land 1,048,000
111 Billboard fixtures 453,000
201 Accounts payable P45,000
202 Unearned advertising
revenues 120,000
207 Loans payable 440,000
… … …
… … …
301 RS, Capital 623,000
… … …
401 Advertising revenue 0
501 Salaries expense 36,000
… … … __________
Total P4,879,000 P4,879,000
Questions:
a. What was the initial entry of LR Advertising (c.1) December revenues
Concepts on December 1 related to the receipt of (c.2) December profit
advance payments from its customers? (c.3) December 31 liabilities
b. How much advertising revenues were earned (c.4) December 31 owner’s equity
during December? d. What should be the adjusting entry of LR.
c. Without any adjustments, what would the effect Advertising Concepts by December 31 to reflect
on the following items in the financial statements the advertising revenues already earned?
(overstated, understated or correctly stated):
3. Accruals
a. Accrued expenses
(1) Utilities
By the end of January, Mateo Publishing House received a bill from Meralco amounting to P19,100. According to the
bill, the amount is based on entity’s consumption of power during January and shall be due 10 days after January
31. Mateo Publishing House has not yet recorded any expense related to its power consumption prior to the receipt
of the bill.
Questions:
a. What was the initial entry of Mateo Publishing (c.2) January profit
House in January related to its consumption of (c.3) January 31 liabilities
power from Meralco? (c.4) January 31 owner’s equity
b. How much utilities expense was incurred during d. What should be the adjusting entry of Mateo
January? Publishing House by January 31 to reflect the
c. Without any adjustments, what would the effect expenses already incurred?
on the following items in the financial statements e. What would be the journal entry of Mateo
(overstated, understated or correctly stated): Publishing House upon payment of utilities on
(c.1) January expenses February 10?
(2) Interest expense (case 1)
On May 30, 2015, Alonso Car Dealer borrowed P2 million pesos from BDO UniBank for use in business expansion.
The loan is due in three (3) years on May 30, 2018 and requires annual payment of interest at an annual rate of
12% every May 30 starting May 30, 2016. Alonso Car Dealer follows calendar year reporting.
Questions:
a. What was the initial entry of Alonso Car Dealer on (c.3) December 31 liabilities
May 30, 2015 related to the interest? (c.4) December 31 owner’s equity
b. How much interest expense was incurred during d. What should be the adjusting entry of Alonso Car
2015? Dealer on December 31, 2015 to reflect the
c. Without any adjustments, what would the effect interest expense already incurred?
on the following items in the financial statements e. What would be the journal entry of Alonso Car
(overstated, understated or correctly stated): Dealer upon payment of interest on May 30,
(c.1) 2015 expenses 2016?
(c.2) 2015 profit
(3) Interest expense (case 2)
On December 1, 2015, Coco Consulting signed a three-month note payable in the amount of P1,000,000 from
EastWest Bank for use in business expansion. The note requires interest at an annual rate of 12. Both principal and
interest is payable at maturity.
Questions:
a. How much interest expense was incurred by c. What would be the journal entry of Coco
Coco Consulting during 2015? Consulting upon payment of the note payable on
b. What should be the adjusting entry of Coco February 28, 2016?
Consulting on December 31, 2015 to reflect the d. Assuming the rate is stated monthly instead of
interest expense already incurred? annually, what would be the answers in letters
(a) and (b) above?

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e. Assuming the rate is silent as to the period (a) and (b) above?
covered, what would be the answers in letters
(4) Salaries and wages (case 1)
Leo Farm has 3 workers with daily rate of P2,000. Leo Farm has a 5-day workweek and pays its workers every
Tuesday of the week. In August 2015, the last Tuesday pay day fell on 25th and Leo Farm prepared its financial
statements on August 31 which is a Monday.
Questions:
a. How much wages expense should be accrued by (c.3) August 31 liabilities
Leo Farm on August 31, 2015 assuming the (c.4) August 31 owner’s equity
workers worked on schedule until August 31? c. What should be the adjusting entry of Leo Farm
b. Without any adjustments, what would the effect by August 31 to reflect the expenses already
on the following items in the financial statements incurred?
(overstated, understated or correctly stated): d. What would be the journal entry of Leo Farm
(c.1) August expenses upon payment of wages on September 1?
(c.2) August profit
(5) Salaries and wages (case 2)
RNB Laundry Solutions pays its staff on a bi-weekly basis on a 5-day workweek. Recurring bi-weekly salaries
of the staff amount to P6,500. RNB Laundry Solutions prepared its financial statements on July 31, 2015.
Remaining workdays in July since the last pay day are July 29, 30 and 31.

Questions:
a. How much salaries expense should be accrued by b. What should be the adjusting entry of RNB
RNB Laundry Solutions on July 31? Laundry Solutions on July 31 to reflect the
expenses already incurred?
b. Accrued Income
(1) Accrued revenue
On October 1, 2015, NSS Accounting Office started rendering bookkeeping services to a client for a monthly
retainer fee of P50,000. By the end of 2015, NSS has not yet billed the client for any retainer fee for the past
three months of services already rendered.
Questions:
a. What was the initial entry of NSS Accounting (c.1) 2015 Fees Earned
Office on October 1 related to its retainer (c.2) 2015 profit
contract with its client? (c.3) December 31 assets
b. How much accounts receivable should be (c.4) December 31 owner’s equity
accrued by NSS Accounting Office on December d. What should be the adjusting entry of NSS
31, 2015? Accounting Office on October 31 to reflect the
c. Without any adjustments, what would the effect revenues already earned?
on the following items in the financial statements
(overstated, understated or correctly stated):
(2) Interest Receivable
On March 31, 2015, Spade Appliances received a P400,000 note from a customer from a sale of an air
conditioning unit. The note will be paid in two annual installments of P200,000 starting March 31, 2016. The
note carries 12% interest payable annually based on outstanding balance of the note at a given period.
Questions:
a. What was the journal entry of Spade Appliances d. What will be the journal entry of Spade
on March 31, 2015 related to its sale to Appliances on December 31, 2016 to reflect
customer? interest already earned?
b. What will be the adjusting entry of Spade e. What will be the journal entry of Spade
Appliances on December 31, 2015 to reflect Appliances upon final settlement of the customer
interest already earned? on March 31, 2017?
c. What will be the journal entry of Spade f. How much is the total interest income of Spade
Appliances upon receipt of the first installment appliances in 2015?
and interest payment from the customer on g. How much is the total interest income of Spade
March 31, 2016? appliances in 2016?
h. How much is the total interest income of Spade
appliances in 2017?
4. Depreciation
On January 1, 2015 Alpha Co. bought a computer equipment amounting to P370,000 for cash. The computer equipment
has useful life of three (3) years and can be sold as scrap for P10,000 at the end of its useful life. The computer
equipment was sold on April 1, 2017.
Questions:
a. What was the journal entry of Alpha Co. on January d. What is the cost of the computer equipment as of
01, 2015 related to its purchase of the computer 1) December 31, 2015
equipment? 2) December 31, 2016
b. What is the journal entry of Alpha Co. on December e. What is the amount of accumulated depreciation as
31, 2015 to adjust for the depreciation of the of
computer equipment? 1) December 31, 2015
c. How much is the depreciation expense in 2) December 31, 2016
1) 2015 f. What is the carrying amount of the computer
2) 2016 equipment as of
3) 2017 1) December 31, 2015

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2) December 31, 2016 2) The computer equipment was sold for P80,000
g. What is the journal entry on April 1, 2017 assuming: cash?
1) The computer equipment was sold for P130,000
cash?
5. Allowance for doubtful accounts
On January 1, JV Co. has P500,000 beginning balance in its Accounts Receivables. The related Allowance for
Doubtful Accounts has a beginning balance of P10,000. Total Sales for the year amounted to P2,000,000, of
which P1,200,000 were made on credit. Collections on account totaled P650,000. Accounts totaling P5,000 were
proved to be worthless and needed to be written off. Accounts previously written off amounting to P2,500 were
recovered during the year. Aging of the Accounts Receivables as of December 31 is as follows:
Age Amount
Current P500,000
1 – 30 days 300,000
31 – 60 days 150,000
Over 60 days 95,000
Questions:
a. What is the journal entry to record the sales for the (1) direct write-off method ?
year? (2) allowance method
b. What is the journal entry to record the collection of 2.1. If doubtful accounts are recognized at
on account receivables? 1% of Sales for the year
c. What is the journal entry to record the write-off of 2.2. If doubtful accounts are recognized at
accounts receivable under 2% of Ending Receivables
(1) direct write-off method ? 2.3. If doubtful accounts are recognized
(2) allowance method? based on aging of ending receivables
d. What is the journal entry to record the recoveries of with the following probabilities of
the account under: collectability: Current: 100% collectable;
(1) direct write-off method ? 1 – 30 days: 98% collectable; 31 – 60
(2) allowance method? days: 95% collectable; over 60 days:
e. What is the journal entry to record doubtful account 90% collectable.
expense at the end of the year under
6. Alternative method of recording deferrals
c. Prepaid Expenses [Expense Method]
(1) Supplies
Neat’s Print Shop purchased advertising supplies costing P50,000 on October 5. Neat’s Print Shop debited the
account Supplies Expense. This account shows a balance of P50,000 in the October 31 trial balance. An inventory
count at the close of business on October 31 reveals that P20,000 of supplies are still on hand.
Questions:
a. What was the initial entry of Neat’s Print Shop on October 5 related to purchase of Supplies?
b. How much supplies were used during October?
c. Without any adjustments, what would the effect on the following items in the financial statements (overstated,
understated or correctly stated):
(c.1) October expenses
(c.2) October profit
(c.3) October 31 assets
(c.4) October 31 owner’s equity
d. What should be the adjusting entry of Neat’s Print Shop by October 31 to reflect the actual consumption of
supplies?
(2) Insurance
On July 4, Maiden Piggery paid P48,000 for a one-year fire insurance policy, beginning immediately. Maiden debited
the cost of the premium to a nominal account at that time. This account still shows a balance of P48,000 in the July
31 trial balance.
Questions:
a. What was the initial entry of Maiden Piggery on July 4 for the payment of premium to the policy provider?
b. How much premium expired during July?
c. Without any adjustments, what would the effect on the following items in the financial statements (overstated,
understated or correctly stated):
(c.1) July expenses
(c.2) July profit
(c.3) July 31 assets
(c.4) July 31 owner’s equity
d. What should be the adjusting entry of Maiden Piggery by July 31 to reflect the actual use of the premium?
(3) Rent
On March 1, 2015, Quijonez Fashion Boutique paid P240,000 for a 24-month rent in advance for the use of a stall in
a flea market. Quijonez recorded the amount paid in a temporary account. On December 31, 2015 trial balance, the
temporary account still shows P240,000 balance related to the rent paid last March 1.
Questions:
a. What was the initial entry of Quijonez Fashion c. Without any adjustments, what would the effect
Boutique Concepts on March 1 related to the on the following items in the financial statements
advance payment made to stall owners? (overstated, understated or correctly stated):
b. How much rent payments were consumed during (c.1) 2015 expenses
the year? (c.2) 2015 profit

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(c.3) December 31 assets d. What should be the adjusting entry of Quijonez

(c.4) December 31 owner’s equity Fashion Boutique by December 31 to reflect the
actual rent payments consumed?

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d. Unearned Income [Revenue Method]

(1) Case 1
On April 1, Nova Solutions, a consulting business, received P1,000,000 advance payments from its clients for
services to be performed in the future. Nova Solutions recorded the same in the revenue account ‘Fees Earned.’ By
the end of April, Nova Solutions fulfilled 40% of the required work based on the contract with its clients. On April 30
trial balance, the revenue account Fees Earned show P1,000,000 balance. Based on Nova Solutions’ Chart of
Accounts, the business uses Unearned Fees to record advance payment received from customers.
Questions:
a. What was the initial entry of Nova Solutions on (c.1) April revenues
April 1 upon receipt of advance payments from its (c.2) April profit
clients? (c.3) December 31 liabilities
b. How much fees were earned during April? (c.4) December 31 owner’s equity
c. Without any adjustments, what would the effect d. What should be the adjusting entry of Nova
on the following items in the financial statements Solutions by April 30 to reflect the actual fees
(overstated, understated or correctly stated): already earned?
(2) Case 2
On December 1, R.S. Advertising Concepts received P120,000 payments in advance for advertising a local product in
one of the billboards it owns for six months starting December 1. On December 31, trial balance, R.S. Advertising
Concepts shows the following partial trial balance:
R.S. Advertising Concepts
Trial Balance
December
Account Account Title (Dr.) (Cr.)
No.
101 Cash P 348,000
… … …
… … …
110 Land 1,048,000
111 Billboard fixtures 453,000
201 Accounts payable P45,000
202 Unearned advertising
revenues 0
207 Loans payable 500,000
… … …
… … …
301 RS, Capital 623,000
… … …
401 Advertising revenue 120,000
501 Salaries expense 36,000
… … … __________
Total P4,879,000 P4,879,000
Questions:
a. What was the initial entry of R.S. Advertising (c.1) December revenues
Concepts on December 1 related to the receipt of (c.2) December profit
advance payments from its customers? (c.3) December 31 liabilities
b. How much advertising revenues were earned (c.4) December 31 owner’s equity
during December? d. What should be the adjusting entry of R.S.
c. Without any adjustments, what would the effect Advertising Concepts by December 31 to reflect
on the following items in the financial statements the actual advertising revenues already earned?
(overstated, understated or correctly stated):

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