CA5101 – Financial Accounting and Reporting

First Term, Academic Year 2021-2022

ADJUSTING JOURNAL ENTRIES

MULTIPLE CHOICE. Choose the letter of the best answer.

1. Entries required at the end of an accounting period to bring the accounts up to date
and to ensure the proper matching of income and expenses are called
A. Adjusting entries.
B. prepaid expenses.
C. Contra entries.
D. Matching entries.

2. Adjusting entries involve

A. Only real accounts.
B. Only nominal accounts.
C. Only capital accounts.
D. At least one real and one nominal account.

3. The beginning balance of the Supplies account for ABC Company is P2,600. During
the year, additional supplies were purchased for P8,700 and were recorded using
asset method. At the end of the accounting period, a physical inventory count
indicates P2,400 of supplies on hand. The adjusting entry on December 31 is:
A. Debit – Supplies, P8,900; credit – Supplies expense, P8,700
B. Debit – Supplies expense, P8,900; credit – Supplies, P8,900
C. Debit - Supplies expense, P8,700; credit – Supplies, P8,700
D. Debit – Supplies, P8,900; credit – Supplies expense, P8,900

4. If ABC Company omitted an adjustment, which of the following would result to

understatement of net income at the end of the accounting period?
A. Omission of accrued expense
B. Omission of depreciation expense
C. Overstatement of a prepaid expense
D. Overstatement of unearned revenue

5. Failure to adjust for accrued salaries at the end of the period will result in an
A. Overstatement of assets.
B. Overstatement of profit for the period.
C. Overstatement of liabilities.
D. Understatement of profit for the period.

6. An adjusting entry to accrue salaries incurred but not yet paid is an example of
A. Aligning recorded costs with appropriate accounting periods.
B. Aligning recorded revenues with appropriate accounting periods.
C. Reflecting unrecorded revenues earned during the accounting period.
 D. Reflecting unrecorded expenses incurred during the accounting period.

7. From the view point of the firm receiving the cash, an item that represents services
that have been paid for by the customer, but have not yet been provided to that
customer by the firm which received the cash, is called
A. Unearned revenue
B. Prepaid expense
C. Accrued expense
D. Accrued revenue

8. The principal difference between depreciation and most other types of expenses is
that depreciation
A. Is subject to more precise measurement.
B. Can be avoided if the asset is in a good condition as when it was purchased.
C. Is not deductible if it will cause a loss.
D. Does not require an immediate cash outlay.

9. When an entity uses property and equipment, the company is required to

A. Create a liability account
B. Reduce a related expense account
C. Transfer an amount from one asset account to another.
D. Allocate the cost of the asset to an expense account.

10. If a P2,500 adjustment for depreciation is omitted, which of the following financial
statement errors will occur?
A. Expenses will be overstated
B. Profit will be understated
C. Owner’s equity will be overstated
D. Assets will be understated

11. A company recorded office supplies in an asset account when the supplies were
purchased. Failure to take an inventory and make an adjusting entry will result in an
A. Understatement of liabilities.
B. Understatement of assets.
C. Understatement of owner’s equity.
D. Overstatement of owner’s equity.

12. Which of the following situations involves a deferral?

A. Recording accrued interest
B. Recording unrecorded salaries
C. Recording depreciation
D. Recording unrecorded revenues

13. An adjusted trial balance is prepared to

A. Test that the ledger is still in balance after the accounts have been adjusted.
B. Facilitate preparation of the financial statements.
C. Both test that the ledger is still in balance after the accounts have been adjusted and
facilitate preparation of the financial statements.
 D. Facilitate preparation of the adjusting entries.

14. The adjusting entry to accrue salaries expense

A. Debits salaries expense and credits cash.
B. Debits salaries expense and credits salaries payable.
C. Debits salaries payable and credits salaries expense.
D. Debits salaries payable and credits cash.

15. Accrued expenses

A. Decrease assets.
B. Decrease liabilities.
C. Increase assets.
D. Increase liabilities.

16. Accrued revenues

A. Decrease assets.
B. Increase assets.
C. Increase liabilities.
D. Decrease liabilities.

17. The journal entry to record accrued revenue results in which of the following types
of accounts being debited and credited?
A. Asset and income
B. Asset and liability
C. Expense and asset
D. Expense liability

18. The entry to record an accrued expense results in which of the following types of
accounts being debited and credited?
A. Asset and income
B. Asset and liability
C. Expense and liability
D. Expense and asset

19. A service vehicle might be depreciated over 5 years because

A. It will be paid for in 5 years.
B. It will help regenerate revenue for the company over the next 5 years.
C. Income tax provisions require depreciation over the next 5 years.
D. It will lose most of its market value in 5 years.

20. The cost of doing business is also known as

A. An asset.
B. Revenue
C. An expense.
D. A liability.
PROBLEM SOLVING. Supply the correct answer for each question. All questions are
independent unless otherwise stated.

PROBLEM A. The following data were taken from the records of Ross Services:

Collections from clients to apply on accounts receivable P144,855

Accrued income at the end of the year 45,600
Unearned income at the end of the year 35,800

1. Compute for the amount of Service income that should be reported during 2022.
154, 655

PROBLEM B. Phoebe Inc. sells magazines by subscription for P15 per copy. During the year,
47,200 two-year subscriptions were sold. As of June 1, 2021, the Unearned Magazine Revenues
account had a balance of P 315,000. At the end of the fiscal year, it is determined that the liability
to provide subscribers’ future magazines amounted to P 613,000.

2. What amount of Magazine Revenues should be shown on the statement of

comprehensive income of Phoebe Inc. for the fiscal year ended May 31, 2022?
410,000

PROBLEM C. Coach Corporation has purchased equipment for P 240,000 on May 1, 2021. The
useful life and salvage value of the equipment is estimated to be 10 years and P 12,000
respectively.

3.Compute for the depreciation expense for the year ended December 31, 2021. 15,200
4.What is the balance of accumulated depreciation on December 31, 2022? 38,000
5. Assuming Coach Corporation sold the equipment for P 150,000 on July 31, 2023,
how much is the gain/(loss) on the sale of equipment? (38,700)

PROBLEM D. The unadjusted trial balance of Joey’s Computer Shop for the fiscal year ended
August 31, 2022 has a balance of P51,250 in its Prepaid Insurance account which is composed of
the following:

Type Period Covered Premium

Fire September 1, 2019 to August 31, 2024 P24,000
TPL March 1, 2021 to February 28, 2022 12,600
TPL May 31, 2022 to April 1, 2023 14,650

Compute for the following:

6.Insurance expense for the fiscal year ended August 31, 2022. 30,094
7.Prepaid insurance balance as of August 31, 2022. 21,156
PROBLEM E. Presented below is the unadjusted trial balance of Go Company for the year ended
December 31, 2021:

Go Company
Trial Balance
December 31, 2021

Debits Credits
Cash P75,000
Office supplies 8,000
Prepaid insurance 12,000
Office equipment 150,000
Computer equipment 60,000
Notes payable P50,000
Accounts payable 5,000
Go, capital 114,000
Go, drawing 35,000
Service revenue 390,000
Rent expense 50,000
Salaries expense 120,000
Utilities expense 49,000
Total P559,000 P559,000

Information for year-end adjustments are as follows:

a. Office supplies on hand at year-end amount to P3,000.

b. On June 1 of the current year, Go purchased office equipment which cost P150,000 with
an expected life of 5 years and no salvage value.
c. Computer equipment costing P60,000 with an expected useful life of 3 years and no
salvage value was purchased on March 31 of the current year.
d. A premium of P12,000 for a one-year insurance policy was paid on November 30.
e. Salaries earned by employees, who have not yet been paid, amounted to P3,100.

8. How much is the adjusted total expenses for the period? 260,600
9. How much is the net income for the year ended December 31, 2021? 129,400
10. How much is the total assets as of December 31, 2021? 266,500
PROBLEM F. At the end of the operations for the year, ABC Services’ accountant prepared the
following trial balance as of December 31, 2021:

Debit Credit
Assets P500,000
Liabilities P100,000
Juan, capital 308,000
Revenues 216,000
Expenses 124,000
Total P624,000 P624,000

In analyzing the accounts of ABC Services, the adjustment data listed below are determined on
December 31, 2021:

a. The prepaid insurance account shows a debit of P3,600, representing the cost of a 2-
year fire insurance policy dated July 1, 2021.
b. On September 1, 2021, rent revenue account was credited for P3,750, representing
revenue from sub-rental for a five-month period beginning on that date.
1 Unearned revenue account was credited for P1,350, representing payment for
services to be rendered uniformly for one year starting August 1, 2021.
d. Accrued expense not yet recorded, 12,800

11. How much is the adjusted net income for 2021? 78,113
12. How much is the adjusted total assets at December 31, 2021? 499,100

PROBLEM G. The following balances are taken from the general ledger of Madeleine Retreat
House at December 31, 2022:

Debit Credit
Accounts receivable P126,000
Allowance for doubtful accounts P2,345
Prepaid insurance 24,600
Building 1,250,750
Accumulated depreciation – building 250,150
Office equipment 85,450
Accumulated depreciation – office equipment 25,635
Kitchen equipment 45,690
Accumulated depreciation – kitchen equipment 25,500
Service income 450,330
Office supplies expense 75,600
Kitchen supplies expenses 86,750
Repair and maintenance expense 24,750
Advertising expense 35,950

Additional data gathered before the preparation of the adjusting entries:

a. All fixed assets are depreciated using the straight-line method. The residual value and
estimated economic lives of the assets are:

Residual value Life in years

Building P200,000 20 years
Office equipment 15,000 10 years
Kitchen equipment* - 8 years

* On October 1,2022, kitchen equipment costing P 6,000 was acquired.

b. Prepaid expenses as of December 31 include the following:

Office supplies SALTA

Kitchen supplies 8,750
Insurance 8,200
Advertising 12,500

c. Accrued expenses as of December 31 include the following:

Utilities P12,660
Salaries 6,000
Taxes 8,530

d. Accrued income as of December 31 include the following:

Service income not yet billed P24,800

Interest income 750

e. Unearned income includes customer deposits of P10,000 which was recorded as credit to the
service income account.

f. Doubtful accounts are estimated at 5% of the adjusted balance of accounts receivable.

Compute for the following:

13. Accounts receivable net of the related allowance. 119,700
14. Total prepayments. 44,700
15. Depreciation expense for the year. 64,731
16. Total expenses. 298,826
17. Net income. 167,054

PREPARATION OF JOURNAL ENTRIES: Prepare the adjusting journal entries for

Madeleine Retreat House (PROBLEM H.). You don’t have to write the explanation and the
posting reference number. To facilitate the checking of papers, you are required to
prepare SIMPLE JOURNAL ENTRIES. You will get a 1.5-point deduction for every error
committed.