Adjusting Entries

ADJUSTING JOURNAL ENTRIES

DEFINITION AND IMPORTANCE OF ADJUSTING JOURNAL ENTRIES  ADJUSTING JOURNAL ENTRIES-ARE ENTRIES

USED TO UPDATE THE ACCOUNTS PRIOR TO THE PREPARATION OF FINANCIAL STATEMENTS BECAUSE THEY AFFECT MORE THAN ONE ACCOUNTING PERIOD

PREPAYMENTS  ARE EXPENSES ALREADY PAID BUT NOT

YET INCURRED OR USED FOLLOWING ARE THE ACCOUNTS SUBJECTED TO ADJUSTMENTS: ASSET METHOD JOURNAL ENTRY UPON PAYMENT PREPAID EXPENSE XXX CASH XXX ADJUSTING JOURNAL ENTRY AT THE END OF THE ACCOUNTING PERIOD EXPENSE XXX

EXAMPLE 1

 ON APRIL 30,2016,X CO. PAID P36,000 WORTH OF

INSURANCE PREMIUM FOR TWO YEARS.GIVE THE ADJUSTING JOURNAL ENTRY ON JUNE 30,2016

ANSWER

JOURNAL ENTRY UPON PAYMENT ON APRIL 30, 2016 PREPAID INSURANCE 36,000 CASH 36,000 PAID TWO -YEAR INSURANCE ADJUSTING JOURNAL ENTRY AT THE END OF THE ACCOUNTING PERIOD JUNE 30, 2016 INSURANCE EXPENSE 3,000 PREPAID INSURANCE 3,000 TO RECORD THE EXPIRED INSURANCE Computation P36,000 = P1,500 X 2= P3,000 24

EXAMPLE 2  SUPPLIES ACCOUNT SHOWED A BALANCE OF

P4,000.SUPPLIES USED DURING THE YEAR AMOUNTED TO P2,300. GIVE THE ADJUSTING ENTRY ON DEC. 31, 2016

ANSWER  ADJUSTING JOURNAL ENTRY ON DEC. 31,2016

SUPPLIES EXPENSE 2,300 SUPPLIES 2,300 TO RECORD SUPPLIES USED FOR THE YEAR

Computation.There is no computation necessary because the P2,300 supplies used during the year was already given in the problem.

Example 3  The trial balance of MONGOLIA CAFÉ

shows Kitchen Supplies and Kitchen Supplies Expense accounts at balances of P8,400. At year end, there are P1,480 of supplies on hand.

answer3  KITCHEN SUPPLIES EXPENSE

KITCHEN SUPPLIES

Computation: 8,400 – 1,480= 6,920

6,920 6,920

DEFERRALS OR UNEARNED INCOME • IS INCOME ALREADY RECEIVED BUT NOT YET EARNED

• LIABILITY METHOD • JOURNAL ENTRY UPON RECEIPT OF CASH

CASH XXX UNEARNED INCOME XXX RECEIVED CASH FOR SERVICES TO BE RENDERED • ADJUSTING JOURNAL ENTRY AT THE END OF THE

ACCOUNTING PERIOD UNEARNED INCOME XXX INCOME XXX TO RECORD EARNED PORTION OF THE LIABILITY

EXAMPLE 1  ON AUGUST 1, DR.YEE RECEIVED P90,000 FOR

DENTAL FEES TO BE RENDERED IN THE NEXT 6 MONTHS. GIVE THE ADJUSTING JOURNAL ENTRY AT THE END OF SEPT.

ANSWER JOURNAL ENTRY UPON RECEIPT OF CASH ON AUGUST 1

CASH 90,000 UNEARNED DENTAL FEES 90,000 RECEIVED CASH FOR DENTALSERVICES TO BE RENDERED ADJUSTING JOURNAL ENTRY ON SEPTEMBER 30 UNEARNED DENTAL FEES 30,000 DENTAL FEES 30,000 TO RECORD DENTAL FEES EARNED Computation. 90,000 /6=15,000 * 2=P30,000

EXAMPLE 2  ON DECEMBER 1,2016, PETIT CO. RECEIVED P48,000

AMOUNT OF ADVANCED RENTALS FOR 6 MONTHS. GIVE THE ADJUSTING JOURNAL ENTRY ON DEC. 31, 2016

ANSWER  JOURNAL ENTRY UPON RECEIPT OF CASH ON DEC.1

CASH 48,000 UNEARNED RENT INCOME 48,000 RECEIVED 6 MONTHS RENT IN ADVANCE o ADJUSTING JOURNAL ENTRY ON DEC. 31 UNEARNED RENT INCOME 8,000 RENT INCOME 8,000 TO RECORD RENT EARNED FOR THE MONTH Computation. 48,000/6=P8,000 *1=P8,000

Example 3  On March 1, 2015, FINLAND Tutorials received

P60,000 representing an advance payment for services to be rendered in November 2015. This was booked using a real account. As of the yearend, only 70% of the expected service was rendered.

answer3  UNEARNED SERVICE REVENUE

SERVICE REVENUE

Computation:60,000 x .70=42,000

42,000 42,000

ACCRUED EXPENSES • ARE EXPENSES ALREADY INCURRED OR USED, BUT NOT YET

PAID • ADJUSTING JOURNAL ENTRY AT THE END OF ACCOUNTING PERIOD EXPENSES XXX EXPENSE PAYABLE /ACCRUED EXPENSE TO RECORD UNPAID EXPENSE

XXX

EXAMPLE 1

 THE COMPANY RECEIVED A MAYNILAD BILL IN THE

AMOUNT OF P9,800 ON DEC. 26, 2016. THE COMPANY INTENDS TO PAY ON JAN. 8, 2017

ANSWER  ADJUSTING JOURNAL ENTRY ON DEC. 31, 2016

UTILITIES EXPENSE 9,800 UTILITIES PAYABLE 9,800 TO RECORD UNPAID UTILITIES FOR THE MONTH

EXAMPLE 2

 UNPAID SALARIES AT THE END OF DEC.31,2016

AMOUNTED TO P18,800 ADJUSTING JOURNAL ENTRY ON DEC. 31,2016

ANSWER SALARIES EXPENSE 18,800 SALARIES PAYABLE 18,800 TO RECORD UNPAID SALARIES AT YEAR END

Example 3  On March 1,2015,Xylophone Tutorials

borrowed money from Metrobank to be used in business.Xylophone issued an interest bearing note for the P285,000,net of 2% processing fee, it received. The bank loan is payable after three years with an annual interest of 15%. Provide the journal entries at year-end 2015.

answer INTEREST EXPENSE 36,352.04 INTEREST PAYABLE/ACCRUED INT. EXPENSE

Computation : 285,000= net of 2% Finding the Principal Amount =x-0.02x =285,000/0.98 Principal = 290,816.32 Interest =Principal x Rate x Time = 290,816.32 x 15% x 10 Annual Interest =43,622.44 = 43,622.44/12 Monthly Int. = 3,635.20 =3,635.20 x 10 =36,352.04

36,352.04

ACCRUED INCOME  INCOME ALREADY EARNED BUT NOT YET RECEIVED

INCOME RECEIVABLE/Accrued Income INCOME TO RECORD INCOME EARNED

XXX

XXX

EXAMPLE 1  A ONE –YEAR, 6% NOTE RECEIVABLE IN THE

AMOUNT OF P200,000 WAS RECEIVED ON JAN. 1, 2016. THE INTEREST AND THE PRINCIPAL ARE PAYABLE ON MATURITY DATE. GIVE THE ADJUSTING JOURNAL ENTRY ON JUNE 30, 2016

ANSWER  ADJUSTING JOURNAL ENTRY ON JUNE 30,2016

INTEREST RECEIVABLE 6,000 INTEREST INCOME 6,000 TO RECORD INTEREST INCOME EARNED Computation. Interest= Principal x Rate x Time = P200,000 x 6% x ½ year = P200,000 X 0.06 X ½ = P6,000 The interest for 6 months is P6,000

Example 2  Drum Stick Chickens rendered catering services last December

15,2015. The contract price amounted to P75,000. Since no payment has been received yet. Drum Stick did not make any journal entry last December 15, 2015.

answer Accrued Service Income/ Service Income

Income Receivable

75,000 75,000

BAD DEBTS/DOUBTFUL ACCOUNTS/UNCOLLECTIBLE ACCOUNTS  BAD DEBTS/DOUBTFUL ACCOUNTS ARE LOSSES DUE TO

UNCOLLECTIBLE ACCOUNTS • ADJUSTING JOURNAL ENTRY AT THE END OF THE ACCOUNTING PERIOD BAD DEBTS EXPENSE XXX ALLOWANCE for BAD DEBTS XXX TO RECORD ESTIMATED UNCOLLECTIBLE ACCOUNTS OR DOUBTFUL ACCOUNTS EXPENSE XXX ALLOWANCE for DOUBTFUL ACCOUNTS XXX TO RECORD ESTIMATED UNCOLLECTIBLE ACCOUNTS

EXAMPLE 1

ACCOUNTS RECEIVABLE SHOWS A BALANCE OF P100,000. IT IS ESTIMATED THAT 8% OF THIS IS UNCOLLECTIBLE. GIVE THE ADJUSTING JOURNAL ENTRY ON DEC. 31, 2016 FOR THE PROVISION OF THE ESTIMATED UNCOLLECTIBLE ACCOUNT

ANSWER BAD DEBTS EXPENSE 8,000 ALLOWANCE for BAD DEBTS 8,000 TO RECORD ESTIMATED UNCOLLECTIBLE ACCOUNTS

Computation. P100,000 X 0.08= P8,000

Example 2  Accounts Receivable shows a balance of P100,000.It is estimated that

8% of this is uncollectible. Allowance for Bad Debts per general ledger has a balance of P1,000.Give the adjusting journal entry on December 31,2016 for the provision of the estimated uncollectible account.

answer Bad Debts Expense 7,000 Allowance for Bad Debts Note:

7,000

Allowance for Doubtful Accounts 1,000 Balance before adjustment 7,000 Adjusting journal entry 8,000 required balance(end)

DEPRECIATION EXPENSE  IS THE ALLOCATION OF PLANT ASSET COST OVER

ITS ESTIMATED USEFUL LIFE. THIS IS THE EXPENSE ALLOTTED FOR THE WEAR AND TEAR OF PROPERTY,PLANT, AND EQUIPMENT DUE TO PASSAGE OF TIME

DEPRECIATION EXPENSE  THE FF. ARE 3 FACTORS CONSIDERED IN

COMPUTING THE DEPRECIATION EXPENSE: 1. COST is the purchase price of the depreciable asset 2. SALVAGE VALUE is the estimated value of the asset at the end of its useful life 3. ESTIMATED USEFUL LIFE, as the name connotes, is not an exact measurement but merely an estimation of the number of years an asset can be useful to the entity.

The formula for computing for annual depreciation is as follows: COST LESS: Salvage Value Depreciable cost Divided by: Estimated Useful Life Annual Depreciation

P xxx xxx P xxx xxx P xxx

Entry: Depreciation Expense xxx Accumulated Depreciation

xxx

EXAMPLE 1  A BUILDING WITH AN ESTIMATED USEFUL LIFE OF 30

YEARS FINISHED CONSTRUCTION ON JUNE 1,2016. THE COST OF THE BUILDING IS 4.8 MILLION PESOS WITH AN ESTIMATED SALVAGE VALUE OF P300,000. GIVE THE ADJUSTING JOURNAL ENTRY ON DEC. 31, 2016 TO RECORD THE DEPRECIATION OF THE BUILDING

ANSWER 1  ADJUSTING JOURNAL ENTRY ON DEC. 31, 2016

DEPRECIATION EXPENSE 87,500 ACCUMULATED DEPRECIATION 87,500 TO RECORD DEPRECIATION EXPENSE FOR THE BUILDING Computation. Cost P4,800.000 Less: SalvageValue 300,000 Depreciable cost P4,500,00 Divided by: Estimated Useful Life 30 years Annual Depreciation P 150,000/12 Monthly Depreciation 12,500 x 7=87,500

Example 2 The company constructed its own building with total cost amounting to P22,000,000. The building has an estimated useful life of 25 years and a salvage value of P1,000,000. The building was completed last April 30 and depreciated started after its completion.

Answer 2 DEPRECIATION EXPENSE 560,000 ACCUMULATED DEPRECIATION 560,000 TO RECORD DEPRECIATION EXPENSE FOR THE BUILDING Computation. Cost P22,000,000 Less: SalvageValue 1,000,000 Depreciable cost P21,000,000 Divided by: Estimated Useful Life 25 years Annual Depreciation P 840,000 Monthly Depreciation 840,000/12=P70,000 70,000 X 8mos.= ₱ 560,000

Example 3 AUSTRALIA Delivery needed four trucks in 2015.Two trucks were purchased on May 1,2015 at ₱1,850,000 each and another two trucks were purchased on July 1, 2015 at a total price 15% higher than the May 1,2015 purchase. For this type of depreciable assets, Australia is allocating 8% of the acquisition cost for scrap value and estimating useful lives at 8 years.

answer3 DEPRECIATION EXPENSE 528,329.17 ACCUMULATED DEPRECIATION 528,329.17 Computation. Cost ₱ 3,700,000 ₱ 4,255,000 Less: SalvageValue 296,000 (340,400) Depreciable cost ₱ 3,404,000 3,914,600 Divided by: Estimated Useful Life 8 years 8 yrs Annual Depreciation ₱ 425,500 489,325 Monthly Depreciation ₱ 35,458.33 40,777.08 May1 to Dec. ₱ 283,666.66 July1 to Dec. ₱ 244,622.50 283,666.66 + 244,622.50 = ₱ 528,329.17

answer3 DEPRECIATION EXPENSE

528,329.17 ACCUMULATED DEPRECIATION

Analysis & Computation: May 1, 2015 1,850,000 x 2=3,700,000 =3,700,000 x 0.08 =296,000 =3,700,000-296,000 =3,404,000/8 =425,500/12 =35,458.33 x 8 =283,666.66

528,329.17

July 1,2015 1,850,000 x 2 x 0.15 =3,700,000 x 0.15 =555,000 =3,700,000 + 555,000 =4,255,000 x 0.08 =340,400 = 4,255,000- 340,400 =3,914,6000 / 8 =489,325/12 =40,777.08 x 6 =244,622.50

So, we will add 283,666.66 + 244,622.50=528,329.16

APPLICATION 1 GIVE THE ADJUSTING JOURNAL ENTRIES ON DEC. 31 GIVEN THE FF. RENT PAID LAST JULY, AMOUNTED TO P21,000, OF WHICH P14,000 HAS ALREADY EXPIRED.THIS WAS INITIALLY RECORDED AS PREPAID RENT UPON PAYMENT.

answer1

RENT EXPENSE PREPAID RENT

14,000

14,000

APPLICATION 2 GIVE THE ADJUSTING JOURNAL ENTRIES ON DEC. 31 GIVEN THE FF. SUPPLIES PURCHASED DURING THE YEAR AMOUNTED TO P2,900, OF WHICH P2,000 HAS BEEN USED DURING THE YEAR.THE ASSET METHOD WAS USED UPON PURCHASE OF THE SUPPLIES.

answer2

SUPPLIES EXPENSE SUPPLIES

2,000

2,000

APPLICATION3 GIVE THE ADJUSTING JOURNAL ENTRIES ON DEC. 31 GIVEN THE FF. UNEARNED INTEREST HAS A BALANCE OF P4,800, OF WHICH P1,900 HAS ALREADY BEEN EARNED DURING THE YEAR. THE AMOUNT WAS INITIALLY CREDITED TO UNEARNED INTEREST UPON COLLECTION

Answer 3

UNEARNED INTEREST 1,900 INTEREST INCOME

1,900

application4 GIVE THE ADJUSTING JOURNAL ENTRIES ON DEC. 31

On March 1,2015, ANGEL Tutorials received ₱70,000 representing an advance payment for services to be rendered in October 2015. This was booked using a real account. As of the year-end, only 80% of the expected service was rendered.

answer4 UNEARNED SERVICE REVENUE SERVICE REVENUE

56,000 56,000

APPLICATION5

UNPAID SALARIES OF ITS CLEANERS AS OF DECEMBER 31 IS P8,000.

ANSWER5

SALARIES EXPENSE 8,000 SALARIES PAYABLE /Accrued salaries expense

8,000

APPLICATION6

On April 1,2015, Devine Tutorials borrowed money from City Savings Bank to be used in business. Devine issued an interest bearing note for the ₱385,000 net of 3% processing fee, it received. Provide the adjusting entries at the year end .

ANSWER6 INTEREST EXPENSE 44,652.06 INTEREST PAYABLE/Accrued Interest Expense

44,652.06

385,907.21 x .97=396,907.21 x .15=59,536.08/12=4,961.34 x 9=44,652.06

Application 7

UNCOLLECTIBLE ACCOUNTS AT YEAR-END IS ESTIMATED TO BE P7,890.

ANSWER7 BAD DEBTS EXPENSE 7,890 ALLOWANCE FOR BAD DEBTS

7,890

APPLICATION 8

ANSWER8

APPLICATION 9

DEPRECIATION EXPENSE FOR ITS EQUIPMENT, P12,000

ANSWER9

DEPRECIATION EXPENSE-EQUIPMENT 12,000 ACCUMULATED DEPRECIATION-EQUIPMENT

12,000

EXERCISE 1

SNOOPY ENTERPRISES PROVIDES COLLECTION SERVICES TO ITS CUSTOMERS.YEAR-END ADJUSTING JOURNAL ENTRIES ARE PREPARED EVERY DEC. 31 AS ITS BOOKS ARE CLOSED. MAKE THE APPROPRIATE ADJUSTING ENTRY FOR EACH OF THE FF ITEMS: 1. UNCOLLECTIBLE ACCOUNTS AT YEAR-END IS ESTIMATED TO BE P6,950. 2. RENT PAID LAST APRIL AMOUNTED TO P400,000,ONE FOURTH OF WHICH HAS ALREADY EXPIRED.THIS WAS INITIALLY RECORDED AS PREPAID RENT UPON PAYMENT. 3. DEPRECIATION EXPENSE FOR ITS TRANSPORTATION EQUIPMENT,P6,780 4. SUPPLIES PURCHASED DURING THE YEAR AMOUNTED TO P4,290,OF WHICH ONE- THIRD HAS BEEN USED DURING THE YEAR.

5. UNPAID SALARIES OF ITS CLEANERS AS OF DECEMBER 31 IS P7,460. 6. UNEARNED INTEREST HAS A BALANCE OF P3,120, OF WHICH P2,560 HAS ALREADY BEEN EARNED DURING THE YEAR. THE AMOUNT WAS INITIALLY CREDITED TO UNEARNED INTEREST UPON COLLECTION.

EXERCISE 3 Bey Cleaners closes its books every December 31 and correspondingly prepares year-end adjusting entries. Make the appropriate adjusting entry for each of the ff. items: 1. Last September 15, Bey Cleaners decided to sign the company for an eight –month advertising contract for a full blast advertising of all its products. The company received p780,000 for the contract and the accountant credited the amount to Unearned Advertising. 2. Last August 30, the company subscribed to a business magazine paying P3,240 for a three-year subscription to start in September. This was recorded to Prepaid Subscription. 3. Supplies account at the beginning of the year showed a balance of P10,800. No purchases were made during the year. Supplies used during the year amounted to P7,100.

 4. A Machine costing P950,000,WITH A SALVAGE VALUE OF

P50,000 and an estimated useful life of 15 years is depreciated on a straight line basis  5. Utilities bill amounting to P3,486 was received on Dec. 27. The company intends to pay it on January 5 the ff. year.  6. Last May 1, the company decided to rent a garage as parking space of its company vehicles. Nine months rent was paid in advance in the amount of P81,000. The Asset Method was used to record this transaction.  7. Last June 15, the company lent Angel Co. P90,000 at 10% per annum.

 8. Last Nov. 1, the third floor of the company building was leased

to Poseidon Enterprises. Bey Cleaners received P184,000 representing an 5-month lease contract. The Liability Method was used to record the receipt of payment.  9. Doubtful accounts at the end of the year are estimated to be 4% of Accounts Receivable which has a balance of P275,000. Allowance for Doubtful Accounts has a credit balance of P9,700 per general ledger before adjustment.  10. The company constructed its own building with total cost amounting to P22,000,000. The building has an estimated useful life of 25 years and a salvage value of P1,000,000. The building was completed last April 30 and depreciated started after its completion.

EXERCISE 1 1.DOUBTFUL ACCOUNT EXPENSE 6,950 ALLO. FOR DOUBTFUL ACCOUNT 2.RENT EXPENSE PREPAID RENT 3. DEPRECIATION EXPENSE-EQUIPMENT ACCUM. DEP-EQUIPMENT 4. SUPPLIES EXPENSE SUPPLIES

6,950

100,000 100,000 6,780 6,780 1,430 1,430

5. SALARIES EXPENSE SALARIES PAYABLE

7,460

6. UNEARNED INTEREST INTEREST INCOME

2,560

7,460

2,560

EXERCISE 3 1.

UNEARNED ADVERTISING INCOME 341,250 ADVERTISING INCOME

2.SUBSCRIPTION EXPENSE PREPAID SUBSCRIPTION

360

3. SUPPLIES EXPENSE SUPPLIES

7,100

341,250

360

4. DEPRECIATION EXPENSE-EQUIPMENT 60,000 ACCUM. DEP.-EQUIPMENT

7,100

60,000

5. UTILITIES EXPENSE UTILITIES PAYABLE

3,486

6.RENT EXPENSE PREPAID RENT

72,000

7.INTEREST RECEIVABLE INTEREST INCOME

4,875

8. UNEARNED RENT RENT INCOME

73,600

3,486

72,000

4,875

9.DOUBTFUL ACCOUNT EXPENSE 1,300 ALLO. FOR DOUBTFUL ACCOUNTS

73,600

1,300

10. DEPRECIATION EXPENSE-BUILDING 560,000 ACCUM. DEP.-BUILDING 560,000