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14 Adjusting Entry Part 1
14 Adjusting Entry Part 1
RULES:
A business will often pay expenses which might relate to a number of accounting periods, the expenses are paid in
advance and are known as prepaid expenses. It is an asset account.
For example, the business might pay its rent quarterly in advance, when paid the amount will have been debited to a
prepaid rent account. At the end of each of the next three months adjusting journal entries are made to record the
amount of rent utilized during the month.
Suppose the quarterly rent is 9,000, at the end of a month the amount of rent expense incurred is 9,000/3 = 3,000,
and the adjusting journal entries will be as follows:
UPON PAYMENT OF ADVANCE RENT:
Prepaid Rent 9,000
Cash 9,000
To record advance payment of rent for three months. (Oct, Nov. Dec.)
9,000 3,000
6,000
Unearned revenue sometimes referred to as deferred revenue, is payment received by a company from a customer for
products or services that will be delivered at some point in the future. The term is used in accrual accounting, in which
revenue is recognized only when the payment has been received by a company and the products or services have not yet
been delivered to the customer. It is a liability account.
ORIGINAL ENTRY: (This entry is an advance collection from the customer for the services being rendered.)
Unearned Revenue 10,000
Tuition Revenue 10,000
To record advance payment of collection. (Service not yet rendered)
ADJUSTING ENTRY: (at the end of the accounting term or cycle when services already rendered)
Tuition Revenue 10,000
Unearned Revenue 10,000
To record earned collection. (Service already rendered)
Xx xx
Activity #1:
ABC COMPANY
1. Half of the rent expense were recognized at the end of the period.
2. Supplies worth 100 were used.
3. Prepaid insurance was decrease by one-third and charged to expense.
Requirements:
XYZ Company
1. One month of the rent were used from the one-time payment of one year.
2. Salary amounting to 195 is still payable to the employee.
3. One-month service revenue recognized as collectible at the end of the period having paid in advance for 7 months.
4. Prepaid insurance of 200 pesos were recognized at the end of the calendar period.
5. Supplies in hand of 500 were exhausted during the period.
Requirements:
REVIEW
A. Adjusting Entries Example #1 – Accrued but Unpaid Expenses
Mr. Jeff, an owner of a small furniture manufacturing company named Azon, offers A-Z varieties of furniture. Azon ends
its accounting year on June 30. The company took a loan of 100,000 for one year from its bank on May 1, 2018, at 10% per
annum for which interest payments have to be made at the end of every quarter. The accountant of the company needs to take
care of this adjusting transaction before closing the accounting records of 2018.
Given:
Loan Amount: 100,000
Interest amount 10% per annum
Monthly Interest Payable: 833.33
First interest payment due date by quarter: July 31, 2018 (May, June, July)
Accounting year end date: June 30, 2018
Directions: Encircle the letter of the correct answer: SHOW YOUR SOLUTIONS. ( 5 points each)
1. Which of the following adjusting entry to record interest which are incurred at the end of the accounting cycle?
A. Debit – Interest Expense 1,667 B. Debit – Interest Payable 1,667
Credit – Interest Payable 1,667 Credit – Interest Expense 1,667
2. What is the entry of the expense after payment of the first fiscal year of the business?
A. Debit – Interest Expense 1,667 B. Debit – Interest Payable 1,667
Credit – Cash 1,667 Credit – Cash 1,667
3. How much is the total Interest Payable at the end of each quarter?
A. 833.33 B. 1,667 C. 2,500 D. 3,333.32
4. How much is the total Interest Expense at the end of the fiscal period of Azon?
A. 833.33 B. 8333.33 C. 1,000 D. 10,000
5. What is the adjusting entry of the accrued interest at the end of the accounting period?
A. Debit – Interest Payable 8,333 B. Debit – Interest Expense 8,333
Credit – Interest Expense 8,333 Credit – Interest Payable 8,333
____1. What is the entry before the adjustment period of purchasing an office supplies of 2,000 in cash?
a. Office supplies 2,000 c. Office supplies expense 2,000
Cash 2,000 Cash 2,000
____2. Using the same entry #1, what is the adjusting entries, if 700 of the office supplies were used during the period?
a. Office supplies expense 1,300 c. Office supplies expense 700
Office supplies 1,300 Office supplies 700
3. Using the same entry on #2, fill up the diaphragm below to illustrate your answer as to ASSET and EXPENSE. (10pts)
ASSET ACCOUNT
TOTAL AMOUNT
EXPENSE ACOUNT
4. Using entry #1, supposed that 80% of the office supplies has expired. Show your solution. (5pts)
____5. What is then the correct adjusting entries using the ASSET method of solution #4?
a. Office supplies 1,600 b. Office Supplies Expense 400
Office Supplies Expense 1,600 Office Supplies 400
____6. What is then the correct adjusting entries using the EXPENSE method of solution #4?
a. Office supplies 1,600 b. Office Supplies Expense 400
Office Supplies Expense 1,600 Office Supplies 400
____7. What is the effect of the office supplies after adjusting period?
a. Office supplies increase as we credit c. Office supplies increase as we debit
b. Office supplies decrease as we debit d. Office supplies decrease as we credit
____8. What is the effect of the office supplies expense after adjusting period?
a. Office supplies expense increase as we credit c. Office supplies expense increase as we debit
b. Office supplies expense decrease as we debit d. Office supplies expense decrease as we credit
____9. Ganda Company acquired a 6 months insurance coverage for its properties on Nov. 1, 2020 for a total of 12,000.
What is the journal entry of the given transaction?
a. Debit – Insurance Expense of 12,000 c. Debit – Cash of 12,000
Credit – Cash of 12,000 Credit – Insurance Expense of 12,000
10. Using the same entry on #9, fill up the diaphragm below to illustrate your answer as to ASSET and EXPENSE.
Show your solutions. (10pts)
Expired amount: ACOUNT TITLE:
TOTAL AMOUNT
____11. Using the solution #10, what is then the adjusting entry using the ASSET method?
a. Debit Prepaid Insurance c. Debit Prepaid Insurance
Credit Insurance Expense Credit Cash
____12. Using the solution #10, what is then the adjusting entry using the EXPENSE method?
a. Debit Prepaid Insurance c. Debit Prepaid Insurance
Credit Insurance Expense Credit Cash
____13. What is the effect of the of the prepaid insurance after the adjusting period?
a. Prepaid insurance decrease c. Insurance Expense decrease
b. Prepaid insurance increase d. Insurance Expense increase
____14. What is the effect of the insurance expense after the adjusting period?
a. Prepaid insurance decrease c. Insurance Expense decrease
b. Prepaid insurance increase d. Insurance Expense increase
____15. What is the correct adjusting journal entry after 6 months, if the accounting period ends on April 30, 2021?
a. Debit Prepaid insurance of 12,000 c. Debit Cash of 12,000
Credit Insurance Expense of 12,000 Credit Prepaid Insurance of 12,000