Chapter 8 Adjusting Entries[ 1228] PDF

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Chapter 8Adjusting EntriesPROBLEM 1: TRUE OR FALSE FALSE – at the end of the period when financial statements are prepared FALSE TRUE TRUE FALSE – “to accrue” means to recognize an income that is already earned but not yet collected, or an expense that is already incurred but not yet paid FALSE - ₱ ...

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Chapter 8 Adjusting Entries PROBLEM 1: TRUE OR FALSE 1. FALSE – at the end of the period when financial statements are prepared 2. FALSE 3. TRUE 4. TRUE 5. FALSE – “to accrue” means to recognize an income that is already earned but not yet collected, or an expense that is already incurred but not yet paid 6. FALSE - ₱200 7. TRUE 8. TRUE 9. FALSE – expense method 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION 1. Advertising expense 200,000 Advertising payable

200,000

2. Interest receivable (180K x 10% x 2/12) Interest income

3,000 3,000

3. Depreciation expense [(420K ÷ 8) x 1/12] Accumulated depreciation

4,375

4. Bad debts expense Allowance for bad debts

4,375

45,000 45,000

Page |2 5. Solutions: Requirement (a): Liability method

Income method

May 1, 20x1

May 1, 20x1

Cash 480,000 Unearned rent 480,000

Cash 480,000 Rent income 480,000

to record the receipt of 1-year rent in advance

to record the receipt of 1-year rent in advance

Requirement (b): Liability method Dec. 31, 20x1

Unearned rent Rent income

Income method Dec. 31, 20x1

320,000 320,000

to recognize the earned portion of the 1-year rent in advance

Rent income 160,000 Unearned rent 160,000 to recognize the unearned portion of the 1-year rent in advance

* (480,000 x 8/12) = 320,000 ** (480,000 x 4/12) = 160,000 6. Solutions: Requirement (a): Asset method

Expense method

Aug. 1, 20x1

Aug. 1, 20x1

Prepaid insurance 360,000 Cash 360,000

Insurance expense 360,000 Cash 360,000

to record the prepayment of 1-year insurance

to record the prepayment of 1-year insurance

Requirement (b): Asset method

Expense method

Dec. 31, 20x1

Dec. 31, 20x1

Insurance expense 150,000 Prepaid insurance 150,000

Prepaid insurance 210,000 Insurance expense 210,000

to recognize the expired portion of the 1-year insurance

to recognize the unexpired portion of the 1-year insurance

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* (360,000 x 5/12) = 150,000 ** (360,000 x 7/12) = 210,000

PROBLEM 3: ADJUSTING ENTRIES 1. Interest expense (300K x 14% x 9/12) Interest payable

31,500 31,500

2. Utilities expense Utilities payable

32,000

3. Rent expense Rent payable

22,000

4. Rent receivable (4K x 2 mos.) Rent income 5. Bad debts expense (400K x 5%) Allowance for bad debts

32,000

22,000 8,000 8,000 20,000 20,000

6. Depreciation expense [(15M ÷ 20) x 8/12] Accumulated depreciation 7. Solutions: Requirement (a): Liability method Nov. 1, 20x1

500,000 500,000

Income method Nov. 1, 20x1

Cash 720,000 Cash 720,000 Unearned income 720,000 Royalty income to record the receipt of advanced royalty income

720,000

to record the receipt of advanced royalty income

Page |4 Requirement (b): Liability method

Income method

Dec. 31, 20x1

Dec. 31, 20x1

Unearned income 560,000 Royalty income 560,000

Royalty income 160,000 Unearned income 160,000

to recognize the earned portion of the advanced royalty

to recognize the unearned portion of the advanced royalty

* 560,000 earned portion (given) ** (720,000 – 560,000) = 160,000 unearned portion 8. Solutions: Requirement (a): Asset method

Expense method

Oct. 31, 20x1

Oct. 31, 20x1

Prepaid insurance 360,000 Cash 360,000

Insurance expense 360,000 Cash 360,000

to record the prepayment of 1-year insurance

to record the prepayment of 1-year insurance

Requirement (b): Asset method

Expense method

Dec. 31, 20x1

Dec. 31, 20x1

Insurance expense 60,000 Prepaid insurance 60,000

Prepaid insurance 300,000 Insurance expense 300,000

to recognize the expired portion of the 1-year insurance

to recognize the unexpired portion of the 1-year insurance

* (360,000 x 2/12) = 60,000 ** (360,000 x 10/12) = 300,000

Page |5 PROBLEM 4: ADJUSTING ENTRIES 1. Interest receivable (400K x 14% x 7/12) Interest income

32,666.67 32,666.67

2. Salaries expense Salaries payable

46,000 46,000

3. Utilities expense Utilities payable

16,000

4. Rent expense Rent payable

240,000

16,000

240,000

5. Depreciation expense 110,000 Accumulated depreciation

110,000

*(360,000 ÷ 3 yrs.) x 11/12 = 110,000 6. Bad debts expense 30,000 Allowance for bad debts 7. Solutions: Requirement (a): Liability method

30,000

Income method

June 1, 20x1

June 1, 20x1

Cash 360,000 Unearned rent 360,000

Cash 360,000 Rent income 360,000

to record the receipt of 1-year rent in advance

to record the receipt of 1-year rent in advance

Page |6 Requirement (b): Liability method Dec. 31, 20x1

Unearned rent Rent income

Income method Dec. 31, 20x1

210,000 210,000

to recognize the earned portion of the 1-year rent in advance

Rent income 150,000 Unearned rent 150,000 to recognize the unearned portion of the 1-year rent in advance

* (360,000 x 7/12) = 210,000 ** (360,000 x 5/12) = 150,000

8. Solutions: Requirement (a): Asset method

Expense method

Sept. 1, 20x1

Sept. 1, 20x1

Prepaid insurance 360,000 Cash 360,000

Insurance expense 360,000 Cash 360,000

to record the prepayment of 1-year insurance

to record the prepayment of 1-year insurance

Requirement (b): Asset method

Expense method

Dec. 31, 20x1

Dec. 31, 20x1

Insurance expense 120,000 Prepaid insurance 120,000

Prepaid insurance 240,000 Insurance expense 240,000

to recognize the expired portion of the 1-year insurance

to recognize the unexpired portion of the 1-year insurance

* (360,000 x 4/12) = 120,000 ** (360,000 x 8/12) = 240,000

Page |7 PROBLEM 5: ADJUSTING ENTRIES 1. Salaries expense [25 employees x (₱600 x 2) x 3 days] 90,000 Salaries payable 90,000 2. Interest receivable (1M x 10% x 5/12) Interest income

41,666.67 41,666.67

3. Interest expense (350K x 12% x 8/12) Interest payable

28,000

4. Utilities expense Utilities payable

13,000

28,000

13,000

5. Depreciation expense [(1.6M ÷ 5 yrs.) x 9/12] 240,000 Accumulated depreciation

240,000

6. Supplies expense (34,000 – 8,000) Prepaid supplies

26,000 26,000

7. Prepaid supplies Supplies expense

8,000

8. Bad debt expense (340,000 x 3%) Allowance for bad debts

10,200

8,000

10,200

Page |8 PROBLEM 6: MULTIPLE CHOICE 1. C 2. D 3. C 4. C 5. C 6. D 7. D 8. A 9. D 10. C Explanation: ➢ Accounts receivable – bad debt expense may need to be accrued. ➢ Prepaid supplies – a portion of this may have been ‘used-up’ and needs to be recognized as expense. ➢ Equipment – depreciation may need to be recognized. ➢ Unearned rent income – a portion may have been earned and needs to be recognized as income. ➢ Notes payable – interest expense may need to be accrued

PROBLEM 7: MULTIPLE CHOICE 1. B Solution: Unadjusted total expenses i. Accrual of salaries expense ii. Depreciation (100K ÷ 10 yrs.) iii. Bad debts (120K x 5%) Adjusted total expenses

239,000 22,000 10,000 6,000 277,000

Page |9 2. A Solution: Unadjusted total income

450,000

ii. Recognition of rent income (90K x 1/3) iv. Accrual of interest income (500K x 12% x 3/12)

30,000 15,000

Adjusted total income

495,000

Unadjusted total expenses

280,000

i. Accrual of utilities expense iii. Recognition of insurance expense

20,000 12,000

Adjusted total expenses

312,000

Adjusted total income

495,000

Adjusted total expenses

(312,000)

Adjusted profit (loss)

183,000

3. D 4. A Solutions: Initial recording Liability method Dec. 1, 20x1

Income method Dec. 1, 20x1

Cash 300,000 Cash 300,000 Unearned income 300,000 Service fee to record the receipt of 3months advance fees

Adjusting entries Liability method Dec. 31, 20x1

Unearned income Service fee

300,000

to record the receipt of 3months advance fees

Income method Dec. 31, 20x1

100,000 100,000

Service fee 200,000 Unearned income 200,000

P a g e | 10 to recognize the earned portion of the advance fees

to recognize the unearned portion of the advance fees

5. D - See solution above. 6. B Solutions: Initial recording: Asset method Sept. 1, 20x1

Expense method Sept. 1, 20x1

Prepaid insurance 240,000 Insurance expense Cash 240,000 Cash to record the prepayment of 1-year insurance

240,000 240,000

to record the prepayment of 1-year insurance

Adjusting entries:

Asset method

Expense method

Dec. 31, 20x1

Dec. 31, 20x1

Insurance expense 80,000 Prepaid insurance 80,000

Prepaid insurance 160,000 Insurance expense 160,000

to recognize the expired portion of the 1-year insurance

to recognize the unexpired portion of the 1-year insurance

7. D 8. A Solution: Accounts receivable Allowance for bad debts (280K x 3%) Carrying amount 9. C Solution:

280,000 (8,400) 271,600

P a g e | 11 Equipment Accumulated depreciation [144K + (360K ÷ 5 yrs.)] Carrying amount

360,000 (216,000) 144,000

10. B Solution: Unadjusted profit i. Interest expense (300K x 16% x 5/12)

360,000 (20,000)

ii. Unearned rent (90K x 2/3)

(60,000)

iii. Unused supplies (60K x 1/4) iv. Unearned service fees (40K x 1/2)

15,000 (20,000)

Adjusted profit (loss)

275,000

Explanations: i. Interest expense is deducted because expense reduces profit. ii. The unadjusted profit includes rent income of ₱90,000. However, only 1/3 of this amount is earned. Accordingly, 2/3 is removed. iii. The unadjusted profit includes supplies expense of ₱60,000. However, ¼ of this amount is unused. Accordingly, the ¼ unused is removed by adding it back to profit so that the adjusted profit reflects only the ¾ used. iv. The unadjusted profit includes service fees of ₱40,000. However, ½ of this amount is unearned. Accordingly, the unearned amount is removed....