Inventory sold cheaper
Adjusting and Non- Simple Meaning: You sold items lower than cost –
showing value was already down before year-end.
Adjusting Events
Adjusting Entry:
ADJUSTING EVENTS Loss on Inventory Write-down ₱15,000
These are events that give new information about Allowance to Reduce Inventory to NRV ₱15,000
something that already existed before year-end (Dec 31).
You need to update the financial statements. Tax underpaid
Simple Meaning: You found out you owe more tax for last
Lawsuit settled year than you first thought.
Simple Meaning: The company already had a case before
year-end, and now it’s confirmed they have to pay. Adjusting Entry:
Adjusting Entry:
Income Tax Expense ₱80,000
Income Tax Payable ₱80,000
Loss from Lawsuit ₱500,000
Provision for Lawsuit ₱500,000
NON-ADJUSTING EVENTS
Customer bankruptcy These are events that happened after year-end and did
Simple Meaning: A customer who owed you money is not exist before. You don’t change the numbers, but if
now bankrupt – shows the money couldn’t be collected. important, you explain it in the notes.
Adjusting Entry: Company bought
Simple Meaning: You bought another company after the
year ended.
Bad Debt Expense ₱100,000
Accounts Receivable ₱100,000 Disclosure Note:
Inventory error found
Simple Meaning: You found a mistake in counting or Disclosure: On January 15, 2025, the company
valuing your stock before year-end. acquired ABC Corp. for ₱10 million.
Adjusting Entry: Fire destroyed warehouse
Simple Meaning: A building was damaged by fire after the
year ended.
Retained Earnings ₱200,000
Inventory ₱200,000 Disclosure Note:
Inventory damage
Simple Meaning: Items were damaged before year-end, Disclosure: On January 10, 2025, a fire destroyed a
and you only found out after. warehouse valued at ₱3 million.
Adjusting Entry: Plan to restructure
Simple Meaning: You decided to close or change part of
the business after year-end.
Loss on Inventory Write-down ₱50,000
Inventory ₱50,000 Disclosure Note:
Asset value went down
Simple Meaning: A property or machine lost value before Disclosure: On January 12, 2025, the board approved
year-end and you got proof after. a restructuring plan for the Davao branch.
Adjusting Entry:
Impairment Loss ₱300,000
Land/Asset Account ₱300,000
Investment dropped Inventory damage
Simple Meaning: The stock market dropped after year- Inventory worth ₱50,000 was found damaged in January
end. 2025, and investigation showed the damage occurred
before year-end.
Disclosure Note:
Asset value went down
An appraisal in January 2025 revealed that land valued at
Disclosure: A post-year-end market crash reduced ₱1,000,000 on December 31, 2024 had actually declined
the value of equity investments. in value to ₱700,000 by that date.
New shares issued Inventory sold cheaper
Simple Meaning: You sold new shares or borrowed Inventory costing ₱100,000 was sold for only ₱85,000
money after year-end. shortly after year-end, confirming that the net realizable
value was already lower at December 31, 2024.
Disclosure Note:
Tax underpaid
After a tax review in January 2025, it was found that the
Disclosure: On January 8, 2025, ₱1 million in new
company under-reported its 2024 income taxes by
shares were issued.
₱80,000.
Dividends declared
Non-Adjusting Events - Specific Problems
Simple Meaning: You announced dividends after the year
ended. Company bought
On January 15, 2025, the company acquired ABC Corp. for
Disclosure Note: ₱10 million.
Fire destroyed warehouse
Disclosure: On January 20, 2025, ₱500,000 in
On January 10, 2025, a warehouse was destroyed by fire.
dividends were declared.
Plan to restructure
New lawsuit filed The company’s management approved a restructuring
Simple Meaning: Someone sued the company after year-
plan on January 12, 2025 to close the Davao branch.
end over a new issue.
Investment dropped
Disclosure Note: In January 2025, the stock market crash reduced the
value of the company's investments by 30%.
Disclosure: On January 18, 2025, a new lawsuit was
New shares issued
filed. Management believes the claim has no merit.
On January 8, 2025, the company issued ₱1 million in
new shares.
Specific Examples (Problem Format) Dividends declared
These are sample problems related to each adjusting and Dividends of ₱500,000 were declared on January 20,
non-adjusting event. 2025.
Adjusting Events - Specific Problems New lawsuit filed
A new lawsuit was filed against the company on January
Lawsuit settled 18, 2025 regarding an issue that occurred in January.
The company had a pending lawsuit as of December 31,
2024. In January 2025, the court ordered the company to
pay ₱500,000.
Challenging Practice Problems
These problems require deeper analysis to determine if
Customer bankruptcy
the event is adjusting or non-adjusting and what the
A customer who owed ₱100,000 as of December 31,
appropriate action is.
2024, was declared bankrupt in January 2025.
Problem 1
Inventory error found
On December 28, 2024, a customer ordered goods and
After year-end, it was discovered that the December 31,
agreed to pay within 30 days. The goods were delivered
2024 inventory was overstated by ₱200,000.
on January 3, 2025. In January, the customer declared
bankruptcy. Should this be treated as an adjusting or non-
adjusting event? What is the proper treatment?
Problem 2
An audit conducted in January 2025 revealed that
inventory counted on December 31, 2024 included
₱150,000 of obsolete items. The obsolescence was due to
a product defect that occurred in early December 2024
but was not discovered until January. What adjusting
entry should be made, if any?
Problem 3
On January 20, 2025, the company was notified of a
lawsuit for environmental damage allegedly caused in
November 2024. Legal advice obtained in February
suggests the company will likely lose and pay damages of
about ₱800,000. Is this an adjusting or non-adjusting
event? Show the appropriate entry if required.
Problem 4
In January 2025, a machine purchased in 2022 was
revalued and found to be impaired. Evidence shows the
impairment occurred in mid-December 2024 due to a
major operational issue. Should this be adjusted in the
2024 financials? What is the correct journal entry?
Problem 5
The company discovered in January 2025 that it had not
recorded depreciation for a newly installed equipment in
August 2024. What type of event is this, and how should it
be handled? Provide the journal entry.
