CHAPTER VII

ADJUSTING ENTRIES

At the end of the chapter, learners shall have:

 defined adjusting entries and explained its importance;

 defined accrual accounting; and
 demonstrated how adjusting entries are recorded for the following:
 Prepaid Expenses
 Deferred Income/Unearned Income
 Accruals
 Depreciation
 Doubtful Accounts.

Need for Adjusting Entries

The life of a business is divided into accounting periods usually covering

one year. It may be a calendar year or fiscal year. A calendar year is a 12-month
period that begins from January 1 and ends on December 31 while a fiscal year
is also a 12-month period but it does not necessarily begin from January 1 as
long as a 12-month period is completed.

At the end of each accounting period when the transactions are

summarized, certain entries are needed to update the books for proper financial
reporting. These entries have not been made because of either of the following
reasons:

1. it is more convenient and practical to wait until the end of the

accounting period to record the activities; or
2. source documents concerning the activities are not yet available or
have not yet come to the accountant’s attention.

In all cases, adjusting entries involve changing account balances at the

end of each accounting period from what they presently contain to what they
must contain.

Accrual Accounting

Matching principle requires the proper association of expenses with

revenues generated during the accounting period. The accrual method of
accounting is generally accepted to be the most accurate basis for proper
matching.
Under the accrual basis of accounting, revenues are recognized in the
period earned (that is when goods are already sold or services are already
performed) rather than when payment is received. Expenses are recognized
when they are incurred (that is when goods are already used or services are
received) rather than when they are paid for.

Adjusting Entries

Some common adjusting entries that need to be made at the end of the
accounting period are for the following:

1. Prepaid expenses
2. Accrued expenses
3. Deferred income
4. Accrued income
5. Depreciation
6. Doubtful accounts

Prepaid Expenses

Some expenses are customarily paid in advance. These expenditures are

called prepaid expenses. Prepaid expenses are expenses already paid but not
yet incurred. They are assets and not expenses. At the end of an accounting
period a portion of prepayments may have expired and thus becomes an
expense. Prepaid expenses may include unused supplies and services which
are not yet received but already paid.

The adjusting entry at the end of the accounting period would depend
whether the Asset Method or the Expense Method was used at the time of
payment.

Illustration:

On December 1, the business paid rent for three months in advance

amounting to P12,000.

The entry on December 1 under the two methods would be:

Asset Method Expense Method

Prepaid Rent 12,000 Rent Expense 12,000

Cash 12,000 Cash 12,000

These two entries are both acceptable but whatever method is used, the
accounts must be adjusted to the correct balances at the end of the period.
Assume that December 31 is the end of the accounting period.

Following accrual accounting, the adjusted or correct balances are

determined as follows:

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 For December- already incurred - Rent Expense 4,000
For January - not yet incurred - Prepaid Rent 4,000
For February - not yet incurred- Prepaid Rent 4,000 8,000
Three month’s rent 12,000

December January February

----------4,000----------- ------------------------
8,000-------------------------
Expense Prepaid

The monthly rent is P4,000 (12,000/3). As of December 31 when the

adjusting entries are made, P4,000, representing rent for one month, is already
incurred or has expired. As of the same date, P8,000 representing rent for two
months is prepaid as it is the rent applicable for a future accounting period.

If we compare the correct account balances with the unadjusted balances,

adjusting entries are as follows:

Asset Method
Unadjusted Correct Balance Adjustment
Prepaid Rent P12,000 Dr. P8,000 Dr. P4,000 Cr.*
Rent Expense zero 4,000 Dr. 4,000 Dr.**

Prepaid rent account has a debit balance of P12,000 inasmuch as the

Prepaid Rent account is debited under the Asset Method.
* From an unadjusted balance of P12,000 Dr., it must be decreased or
credited by P4,000 to arrive at an adjusted balance of P8,000 Dr.
** From a zero balance, it must be increased or debited by P4,000 to arrive
at an adjusted balance of P4,000.

The adjusting entry is:

Rent Expense 4,000
Prepaid Rent 4,000

When the adjusting entry is posted, the balances of the accounts will be:

Prepaid Rent Rent Expense

Dec. 1 12,000 Adj. Entry 4,000 Adj. entry 4,000
Bal. 8,000 Bal. 4,000

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Expense Method
Unadjusted Correct Balance Adjustment
Prepaid Rent zero P8,000 Dr. P8,000 Dr.*
Rent Expense P12,000 4,000 Dr. 8,000 Cr.**

The unadjusted balance of the Rent Expense account is P12,000

inasmuch as Rent Expense was debited under the expense method.

* To arrive at the correct balance of P8,000 Dr., from a zero balance it

must be increased or debited by P8,000.
** From an unadjusted balance of P12,000 Dr. to the correct balance of
P4,000 Dr., it must be decreased or credited by P8,000.

The adjusting entry is:

Prepaid Rent 8,000
Rent Expense 8,000

When the adjusting entry is posted, the balances of the accounts will be:

Rent Expense Prepaid Rent

Dec. 1 12,000 Adj .Entry Adj. entry 8,000
8,000
Bal. P4,000 Bal. P8,000

Accrued Expenses

At the end of the accounting period, there are some expenses where
benefits have already been received but for which payment has not been made.
These unpaid expenses are called accrued expenses. Following accrual
accounting, the expense should be charged in the accounting period when they
are incurred and not when payment is made. Hence for each unrecorded and
unpaid expense, an adjusting entry debiting the expense account and
crediting the accrued liability is made at the end of the accounting period.

Illustration 1

Assume that Tripler Repair Shop has an unpaid rent of P2,000 applicable
to the last two months of the current year.

This rent has already been incurred thus the entry to set up an expense
and liability account would be necessary. The entry is as follows:

Dec. 31 Rent Expense 2,000

Accrued Rent Expense/Rent Payable 2,000

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Illustration 2

Tripler Repair Shop has an existing notes payable for P30,000 bearing an
interest rate of 10% which was issued on December 1 and will mature on
March 1. Usually interest on notes payable is recorded upon payment, but
interest accrues every day. From the time the note was issued (Dec.1) up to the
end of the accounting period (Dec. 31) there is an applicable interest computed
as follows:

Principal P30,000
x rate 10%
Annual Interest 3,000
x time (Dec. 1-31) 30/360
Accrued interest P 250

This interest although not yet paid must be recognized since it is already
incurred. The adjusting entry will then be:

Interest Expense 250

Accrued Interest Expense/Interest Payable 250

Deferred Income/Unearned Income

Cash is sometimes received in advance for services to be rendered or

goods to be delivered in the future. These are income already received but not
yet earned. This is known as deferred income or unearned income.

Upon receipt of the cash, two alternative methods of recording may be

used. The cash collected may be credited to Unearned Income/Deferred Income
account (liability method) or it may be credited to an Income account (income
method).

Illustration:

On December 15, Tripler Repair Shop received subscriptions in advance

of P15,000.

Assuming the liability method is used, subscriptions collected would be

credited entirely to Deferred Subscription Income or Unearned Subscription
Income. If the income method is used, Subscription Income would be
credited. Upon receipt of the income, the following entries would be made.

Liability Method Income Method

Cash 15,000 Cash 15,000

Deferred Subs Income 15,000 Subscription Income 15,000

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 Assume that a review of the subscription shows that 80% of the
collections are already earned. Analysis of this information as of year-end
follows:

Subscriptions earned (80%) P12,000

Subscriptions still unearned 3,000
Total Subscriptions P15,000

To determine the adjustments necessary to change the present balances

to their correct balances, the balances are compared as follows:

Liability Method
Unadjusted Correct Balance Adjustment

Subscription Income zero P12,000 Cr P12,000 Cr. *

Deferred Subscription P15,000 Cr. 3,000 Cr. 12,000 Dr.**
* To increase Subscription Income from zero to P12,000 would
require a credit of P12,000.
** Decreasing Deferred Subscription from P15,000 to P3,000
would require a debit of P12,000.

The adjusting entry is:

Deferred Subscription 12,000
Subscription Income 12,000

After the adjusting entry is posted, the account balances will be:

Deferred Subscription Income Subscription Income

Adj. entry 12,000 Dec. 15 15,000 Adj.entry 12,000
Bal. 3,000 Bal. 12,000

Income Method
Unadjusted Correct Balance Adjustment

Subscription Income P15,000 Cr. P12,000 Cr P3,000 Dr.*

Deferred Subscription zero 3,000 Cr 3,000 Cr.**
* Decreasing an income account from P15,000 to P12,000
requires a debit of P3,000.
** Increasing a liability from zero to P3,000 requires a credit of
P3,000.

The adjusting entry would be:

Subscription Income 3,000
Deferred Subscription 3,000

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 After the adjusting entry is posted, the account balances will be:

Deferred Subscription Income Subscription Income

Adj. Entry 3,000 3,000 Dec.15 15,000
Adj. entry
Bal. 3,000 Bal. 12,000

Accrued Income

While there are times when collections are received in advance, there are
also times when no collections have been received although the earning process
is already complete. In the latter case, there is Accrued Income, that is, the
income is already earned but not yet received. At this point, it is important to
recall that under the accrual accounting, income is recognized when earned and
not when received. Thus, when there is an uncollected income which is already
earned, there is a need for us to adjust the books to recognize income and to set
up the corresponding receivable account.

Illustration:

Assume that Rosales Company leased a portion of its building to Galapon

Incorporated at a monthly rental of P10,000. Assume further that the rent for
December is still uncollected as of December 31.
Adjustment recognizing the uncollected income for December will be
recorded in the general journal as:
December 31 Accrued Rent Income 10,000
Rent Income 10,000

Accrued Rent Income is a receivable account, a current asset.

Depreciation

Fixed assets, with the exception of land, decrease in value due to wear
and tear from operations. They also decrease in value due to inadequacy and
obsolescence. Inadequacy is caused by business expansion such that the fixed
asset although still in good condition, can no longer fulfill the needs of the
business. Obsolescence results from the introduction of new methods or
inventions making it necessary to replace the old asset with a new one.

The gradual decrease in value of a fixed asset due to use, inadequacy

and obsolescence is called depreciation. It is an operating expense of the
business and must be shown in the books and financial statements.

Depreciation can never be exactly calculated, however, there are various

methods of arriving at an estimated depreciation, one of which is the straight-line
method which is the simplest and most widely used. Under this method, the cost

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of the fixed asset after taking into consideration any amount recoverable upon
disposing the asset is allocated equally over the periods expected to be
benefited. Three factors are to be considered in computing depreciation:
a. Asset cost which is the amount an entity paid to acquire the depreciable
asset.
b. Estimated salvage value, the amount that the asset can probably be
sold for at the end of its estimated useful life.
c. Estimated useful life or economic life is the estimated number of
periods that an entity can make use of an asset. Useful life is an
estimate, not an exact amount.

The formula in computing the annual depreciation of a fixed asset using

the straight-line method is

Where: D refers to annual depreciation;

C refers to the asset’s original cost;
SV refers to the salvage value of the asset; and
EL refers to the estimated useful or economic
life of the asset.

Illustration:

Let us assume that Corpuz Company purchased on January 1 an

equipment costing P260,000. The equipment is estimated to have a useful life of
10 years at the end of which it can be sold for P20,000.

The computation of the annual depreciation is as follows:

Cost P260,000
Less: Salvage Value 20,000
Cost to be depreciated 240,000
Divided by estimated life 10
Depreciation per year P24,000

Adjusting entry would be:

December 31 Depreciation Expense 24,000
Accumulated Depreciation 24,000

Assuming that the equipment was purchased on September 30 and not

on January 1. It has to be depreciated for only three (3) months, that is, from
September 30 to December 31. The equipment has been with the company for
only three (3) months hence, the depreciation must only be for three months.
This is called fractional depreciation. Computation will now be:

Depreciation per year P24,000

Divided by number of months in a year 12
Monthly depreciation 2,000

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 Multiply by number of months used 3
Depreciation Expense P6,000
The adjusting entry would appear in the general journal as:

December 31 Depreciation Expense 6,000

Accumulated Depreciation 6,000

Accumulated Depreciation is the total amount of depreciation that has

already been recorded for the property. It is presented in the balance sheet as a
deduction from the related fixed asset and is being classified as contra-asset
account. The difference between the cost of the property and the accumulated
depreciation amount is called the net book value. Accumulated depreciation is
also a valuation account because it is used to determine the depreciated value of
the property. The net book value represents the portion of the property that has
not been recorded as depreciation expense. Assuming the same data above, the
accumulated depreciation in the second year is P48,000 (P24,000 + P24,000)
and the net book value is P212,000 computed as follows:

Cost of Equipment P260,000

Less: Accumulated Depreciation 48,000
Net Book Value P212,000

Doubtful Accounts

Despite great care taken in granting credit to customers, the business

usually suffers losses from accounts receivable that proves to be uncollectible.
Such losses are referred to as doubtful accounts expense or uncollectible
accounts expense which is an operating expense of the business. For proper
income measurement, it is important that a provision for uncollectible accounts
be recorded during the same period that the income from sales is recognized.
Thus, at the end of each accounting period an adjusting entry for doubtful
accounts with the following pro-forma entry appears in the general journal:

Doubtful Accounts Expense xx

Allowance for Doubtful Accounts xx

Methods of estimating the probable loss from uncollectible accounts could be:
1. Percentage of gross sales or net sales;
2. Allowance for doubtful accounts is increased by a certain
percentage of accounts receivables; and
3. Allowance for doubtful accounts is increased to a certain
percentage of accounts receivables.

Illustration:
Assume that the total sales for the year 202A amounted to P400,000, the
balance of the accounts receivable is P200,000 and the balance of allowance for
doubtful accounts is P1,000. Assuming doubtful accounts are estimated as
follows, determine the entry to adjust the books.
1. 1% of total sales

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 2. Allowance is to be increased by 3% of accounts receivable
3. Allowance is to be increased to 3% of accounts receivable
Entries on December 31:

1. Doubtful Accounts Expense (1% x 400,000) 4,000

Allowance for Doubtful Accounts 4,000

2. Doubtful Accounts Expense (3%x 200,000) 6,000

Allowance for Doubtful Accounts 6,000

3. Doubtful Accounts Expense* 5,000

Allowance for Doubtful Accounts 5,000

*Required Allowance (3% x 200,000) P6,000

Beginning Balance 1,000
Doubtful Accounts Expense P5,000

Take note that while No. 2 computed directly the increase in allowance,
No. 3 estimated the final balance of the allowance, hence, there is a need to
consider any beginning balance of the allowance for doubtful accounts before
making the adjustment.

The Allowance for Doubtful Accounts is another example of a contra-

asset account. It is shown in the balance sheet as a deduction from Accounts
Receivable. The difference which is expected to be collectible in the future is
called the net realizable value of the accounts receivable. In the illustrations
given, net realizable value is computed as follows:

No. 1 No. 2 No. 3

P200,00 P200,00 P200,00
Accounts Receivable 0 0 0
Less: Allowance for Doubtful
Accounts 5,000 7,000 6,000
P195,00 P193,00 P194,00
Net Realizable Value 0 0 0

Direct write-off method - Bad debts XX

A/R XX

Allowance method - Allow. for DA XX

A/R XX

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 SUMMARY

This chapter discussed what adjusting entries are and explained their
purpose in relation to accrual accounting. At the end of each accounting period
when the transactions are summarized, certain entries are needed to update the
books for proper financial reporting. Matching principle requires the proper
association of expenses with revenues generated during the accounting period.
Under the accrual basis of accounting, revenues are recognized in the period
earned rather than when payment is received and expenses are recognized
when they are incurred rather than when they are paid for. Some common
adjusting entries that need to be made at the end of the accounting period are
for the following: (1) prepaid expenses; (2) accrued expenses; (3) deferred
income; (4) accrued income; (5) depreciation, and; (6) doubtful accounts.

Prepaid expenses are expenses already paid but not yet incurred. The
adjusting entry at the end of the accounting period would depend whether the
Asset Method or the Expense Method was used at the time of payment.

Accrued Expenses are expenses already incurred but not yet recorded or
paid where an adjusting entry debiting the expense account and crediting the
accrued liability is made at the end of the accounting period.

Deferred Income or Unearned Income are income already received but

not yet earned. The adjusting entry at the end of the accounting period would
depend whether the Liability Method or the Income Method was used upon
receipt of the cash.

Accrued Income is income already earned but not yet received. When
there is an uncollected income which is already earned, there is a need to adjust
the books to recognize income and to set up the corresponding receivable
account.

The gradual decrease in value of a fixed asset due to use, inadequacy

and obsolescence is called depreciation. The simplest and most widely used
method of estimating depreciation is the straight-line method, where the cost of
the fixed asset after taking into consideration any amount recoverable upon
disposing the asset is allocated equally over the periods expected to be
benefited.

Doubtful accounts expense are losses from accounts receivable that

proves to be uncollectible. The three methods of estimating the probable loss

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from uncollectible accounts are: (1) as a percentage of gross sales or net sales;
(2) as an increase by a certain percentage of accounts receivables; and (3) as
an increase to a certain percentage of accounts receivables.

1. What are adjusting entries?

2. Discuss the need for adjusting entries.

3. What is accrual accounting?

4. Identify and describe the common adjusting entries that need to be made.

5. What are prepaid expenses?

6. What are the two methods of accounting for prepaid expenses?

7. What account should be debited in the adjusting entry for prepaid

expense assuming the asset method was used?

8. What is deferred income?

9. What are the two methods of accounting for deferred income?

10. What account should be credited in the adjusting entry for deferred
income assuming the income method was used?

11. What is depreciation?

12. What is the most common method of computing depreciation? What is the
formula?

13. What are doubtful accounts? What are the different methods of computing
doubtful accounts?

14. What is Net Book Value? What is Net Realizable Value?

15. What are examples of contra asset accounts? How do we account for
these?

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1. Sigma Trading pays salaries of P48,600 every Saturday for a six-day work
week. Assuming that the last day of the accounting period is December 31
which falls on a Wednesday, what adjusting entry should be made on such
date?

2. Dominic Company issued a P50,000, 120-day, 16% note on October 15,

202B. Assuming Dominic’s accounting period ends on December 31, 202B,
what adjusting entry should be prepared on such date?

3. Gabrielle International signed a contract with Danielle Advertising to promote

its new product line. The contract was signed on August 31, 202A and the
contract price of P45,000 will be paid upon the expiration of the contract
period on May 1, 202B. Assuming the accounting period of Gabrielle ends
on January 31 what adjusting entry should be prepared on such date?

4. Omega Trading paid rent of P40,000 for 8 months in advance on April 30,
202B. Assuming that Omega’s accounting period ends on July 31, 202B,
give the entry to record the following under the Asset and Expense Methods:
a. Payment of rent on April 30, 202B
b. Adjusting entry on July 31, 202B

5. On February 28, 202B, Gibran Industries paid its annual insurance premium
of P42,000. Assuming Gibran’s accounting period ends on October 31 202B,
give the entry to adjust its books on such date using the Asset and Expense
Methods.

6. The following appears on the trial balance of Patrick Company on March 1,

202B: Prepaid Advertising P20,000
Prepare the adjusting entry on March 1, the end of the accounting period,
assuming that the balance of P20,000 in the Prepaid Advertising account
represents a five-month contract effective January 1 of the same year.

7. Laser Company issued a 120-day, 12% note of P25,000 on July 17, 202B.
The total amount of interest on the note was paid when the note was issued.
Assuming Laser’s accounting period ends on August 31 202B, give the entry
to adjust its books assuming
a) Prepaid Interest account was debited on July 17, 202B
b) Interest Expense account was debited on July 17, 202B

8. The Supplies on Hand account of Marie Company showed a balance of

P4,500 on December 31, 202B. It was determined that supplies used during

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 the year amounted to P2,000. Give the entry to adjust the books of Marie
Company.

9. The general ledger of Eman Company shows the Prepaid Advertising with a
balance of P9,600 at the end of its accounting period on May 31, 202B. The
advertising contract started October 1, 202A and is effective for a 12-month
period. Give the entry to adjust the books of Eman Company.

10. The general ledger of Rich Company shows the Prepaid Advertising account
with a balance of P45,000 at the end of its accounting period on May 31,
202B. The advertising contract started October 1, 202A and is effective for a
15 month period. Give the entry to adjust the books of Rich Company.

11. Limuel Commercial received a P30,000, 120-day, 20% note from its
customers on April 16, 201B. Assuming Limuel’s accounting period ends on
July 31, 201B, give the entry to adjust the books.

12. Legacy Word and Music has for rent an unused portion of its building to a
bank. It collects the quarterly rent of P81,000 at the end of every quarter.
Assuming that Legacy’s accounting period ends on October 31, and that the
last time rent was collected was on September 30, what is the entry to adjust
the books of Legacy on October 31?

13. Dominique Commercial received a five month rent of P45,200 on July 31,
202B. Assuming its accounting period ends on November 30, give the entry
to record the
a) receipt of rent on July 31, 202B
b) adjusting entry on November 30, 202B using the liability Method and
Income Method.

14. The following item appears in the trial balance on December 31, 202B:
Unearned Rent P75,000
Prepare the adjusting entry assuming that rental was received on August 1,
202B for six months in advance.

15. The following item appears in the trial balance on December 31, 202B:
Interest Income P1,120
Prepare the adjusting entry assuming that the interest was received on
December 10, 202B on a 60-day, 24% note for P28,000.

16. The Unearned Subscriptions account of the Daily Newspaper Company

showed a balance of P1,678,900. It was determined that actual
subscriptions earned during the year amounted to P1,455,800.

17. The JLS Basketball Association had ticket sales of P50,000 for the year
202B. It was determined that P33,000 of the total ticket sales were for
games to be played after the end of its accounting period. Prepare the entry
to adjust its books if the ticket sales were originally credited to a) Sales and
b) Unearned Ticket Sales.

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18. Sun Shine Company purchased a machine for P75,000 on July 1, 202A. It
is estimated that it will have a useful life of 10 years and scrap value of
P8,000. Give the entry to record depreciation on the machinery assuming
Sun Shine Company’s accounting period ends on
a) December 31, 202A b) June 30, 202B

19. ABC Company’s Equipment account with a balance of P208,000 as of the

beginning of the year 202B, is composed of the following:

Equipment Cost Scrap Value Estimated Life (yrs)

A P75,000 P10,000 8
B 50,000 4,000 4
C 39,000 - 3
D 44,000 3,000 5
On April 1 202B, equipment with a cost of P32,000 was acquired. The
equipment is estimated to have a useful life of 8 years with a scrap value of
P2,400.
Compute the depreciation expense on the equipment of ABC Co. for the
year 202B and the corresponding adjusting entry, assuming its accounting
period ends on December 31.

20. The following information is taken from the trial balance of Crystal Company
on December 31, 202B:

Accounts Receivable P25,500

Allowance for Bad Debts 500
Sales 90,000
Sales Returns and Allowances 2,500

Compute the Bad Debt Expense for the year under each of the following
assumptions:
a. 4% of the outstanding receivable is estimated to be
uncollectible.
b. Company policy is to maintain a balance sheet provision for
doubtful account losses equal to 5% of outstanding receivables.
c. One percent of net sales should be reserved for doubtful
accounts
d. The allowance for doubtful accounts is to be increased by 2% of
outstanding receivables.
e. 1/2 of 1% of net sales are believed to be uncollectible.

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Problem 7-1
The following trial balance was taken from the books of Sigma Trading
Enterprises on December 31, 202A.
Sigma Trading Enterprises
Trial Balance
December 31, 202A

Dr Cr

Cash on Hand P115,000

Accounts Receivable 235,000
Merchandise Inventory 392,000
Office Supplies Inventory 13,000
Store Supplies Inventory 6,000
Prepaid Insurance 12,000
Store Equipment 48,000
Accounts Payable P100,000
Notes Payable 200,000
Interest Payable 6,000
Morales, Capital 400,000
Sales 1,400,000
Purchases 900,000
Rent Expense 150,000
Salary Expense 120,000
Taxes Expense 35,000
Other Expenses 80,000
_______ ________
P2,106,000 P2,106,000

Additional Information
a. It is estimated that 5% of the outstanding receivable will be
uncollectible.
b. Store equipment was purchased on May 31 of the current year and
is expected to be useful for 6 years at the end of which, it can be
sold for P3,000.
c. Insurance for 2 years in advance was paid on July 1 of the current
year.
d. A physical count shows the following:
Office Supplies P2,000
Store Supplies 4,000
Merchandise Inventory 55,200
e. No interest has been taken on its own 40-day, 18% note of P6,000
dated December 1.
f. Accrued expenses are: salary, P20,000 and taxes, P9,800.

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 g. Rent for November and December amounting to P20,000 have not
yet been paid.

Required: Prepare all necessary adjusting journal entries.

Problem 7-2

The trial balance of Juan Trading as of September 30, 202B is given

below together with additional data for adjustments. You are required to prepare
the necessary adjusting entries.

Juan Trading
Trial Balance
September 30, 202B

Dr Cr

Cash on Hand and in Bank P13,240

Accounts Receivable 27,500
Allowance for Doubtful Accounts P1,500
Notes Receivable 4,000
Merchandise Inventory 14,000
Prepaid Insurance 540
Supplies Inventory 600
Accounts Payable 17,500
Notes Payable 10,000
Juan, Capital 40,000
Juan, Drawing 1,200
Sales 68,065
Sales Returns and Allowances 850
Sales Discounts 750
Purchases 53,500
Purchase Returns and Allowances 1,100
Purchase Discounts 530
Freight In 350
Salaries Expense 10,500
Advertising Expense 4,200
Office Utilities Expense 1,500
Rent Expense 6,000
Interest Income 140
Interest Expense 105
P138,835 P138,835

Additional Data:
a. Inventories on September 30: Merchandise, P16,800 and Supplies,
P300.

b. It is estimated that only 90% of outstanding accounts receivable will be

good and collectible.

c. Notes on hand include the following:

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 - a 30-day, 16% note for P1,000 dated September 10. Not-discounted
- a 60-day, 20% note for P2,000 dated September 11. Discounted
- a 45-day non-interest bearing note for P1,000 dated September 20.

d. Annual insurance premiums were paid on the following:

- a fire insurance policy for P150,000 taken on January 1 for
which a premium of P300 was paid.
- an accident insurance policy for P1,000 taken on August 1 for
which a premium of P240 was paid.

e. Outstanding notes payable include the following:

- a 60-day, 18% note for P3,500 discounted on September 10.
- a 90-day, 19% note for P6,500 issued on September 1. Non-
discounted.

f. Accruals are: salaries, P2,500 and office utilities, P350.

g. Rent for six months in advance was paid on August 1.

h. Advertisement to a business magazine for P4,200 for four months began

with the September issue of the current year.

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Problem 7-3
Queen City Videotape
Trial Balance
December 31, 202B

Dr Cr

Cash on hand P175,000

Accounts Receivable 30,000
Unused Supplies 10,000
Videotape Inventory 105,000
Furniture and Fixtures 80,000
Accounts Payable 50,000
Notes Payable 35,000
Elena Delaya, Capital 212,000
Rental Income 180,000
Other Income 18,000
Salaries Expense 95,000
P495,000 P495,000

The following errors and omissions were discovered at year-end:

a) Doubtful Accounts should be provided at 1% of the outstanding receivable

balance.
b) Actual cost of supplies used amounted to P6,000.
c) Physical inventory conducted on December 31, 202B found out that
P15,000 worth of videotapes are damaged.
d) Furniture and fixtures with estimated life of 5 years and with a scrap value
of P5,000 at the end of its life were acquired on October 1, 202B.
e) Owner’s withdrawal was erroneously charged to salaries expense,
P20,000.
f) Interest on Notes Payable has been accrued, P4,000.
g) Payment for the purchase of videotapes on account was not recorded,
P15,000.

Required: Prepare the adjusting entries.

158
Problem 7-4
Giant Trading Enterprises
Trial Balance
December 31, 202B

Dr Cr

Cash on hand P11,500

Accounts Receivable 30,000
Allowance for Doubtful Accounts P500
Merchandise Inventory, Beg 39,200
Office Supplies Inventory 1,300
Store Supplies Inventory 600
Prepaid Insurance 1,200
Store Equipment 4,800
Accounts Payable 10,000
Notes Payable 20,000
Interest Payable 600
Merced, Capital 58,000
Sales 140,000
Purchases 90,000
Rent Expense 15,000
Salary Expense 12,000
Taxes Expense 3,500
Other Expenses 20,000
P229,100 P229,100

Additional Information:
a) It is estimated that 5% of outstanding accounts receivable will be
uncollectible.
b) The store equipment was purchased on May 31 of the current year and is
expected to be useful for 5 years, at the end of which it can be sold for
P300.
c) Insurance for 2 years in advance was paid on July 1 of the current year.
d) A physical count shows the following:
1. Office Supplies, P300.
2. Store Supplies, P100.
3. Merchandise Inventory, P45,200.
e) No interest has been taken on own 45-day, 18% note for P6,000 dated
December 1.
f) Accrued expenses are salary, P1,500 and taxes, P850.
g) Rent for December has not yet been paid, P3,000.

Required: Prepare adjusting entries.

159
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