PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

Seeds of the Nations

Name:
COMPLETING THE ACCOUNTING CYCLE:
(Cont.)
Adjusting entries involving estimates
1. DEPRECIATION
 The concept of depreciation involves the systematic and rational allocation of the cost of long-lived assets
over multiple accounting periods it is used to generate revenue (cost allocation, not valuation concept).
 Follows the matching principle.
 PPE, with the exception of land, are subject to depreciation.

Straight-Line method of depreciation: (the simplest and most widely used method of depreciation)

Cost − Residual value

Annual Depreciation =
Estimated useful life

Pro-forma entry:
Depreciation Expense xx
Accumulated Depreciation Xx

 The use of the contra account allows the disclosure of the original cost of the asset in the statement of
financial position.
 Carrying value of PPE is computed as the difference of the cost and the accumulated depreciation account.

2. BAD DEBTS EXPENSE

 Estimating uncollectible accounts on receivable accounts.
 Also known as Impairment of Receivables.
 The total amount of uncollectible accounts is an expense that arises by selling on credit.
 Net realizable value of Accounts receivable is equal to the difference of Accounts receivable ending
balance and Allowance for doubtful accounts balance.

Two methods of recording bad debts:

1. DIRECT WRITEOFF – directly removes the estimated uncollectible amount from receivables whether it is
probable or not that the amount will not be collected.
o The only method allowed for income tax purposes.

Pro-forma entries:
Bad debts expense xx
Accounts receivables Xx

Recovery of accounts written off

Accounts receivables xx
Bad debt recovery* Xx

Cash xx
Accounts receivable Xx

* Bad debt recovery is other income account.

2. ALLOWANCE METHOD – a more prudent method of estimating uncollectible accounts. It sets up first an
allowance account for the estimation of uncollectible accounts. Once it is probable that the account is
uncollectible, derecognize the allowance and remove the amount from receivables.
 The accounts receivable account is not directly credited,
 If the base used for estimating uncollectible account is:
o A balance sheet account, the amount estimated is the required balance of the allowance account.
 o An income statement account, the amount estimated is an addition to the balance of the allowance
account.
 In contrast to the direct write-off method, recording write-offs and recoveries under the allowance
method does not affect profit.

Pro-forma entries:
Bad debts expense xx
Allowance for bad debts xx

Probable that the account is uncollectible

Allowance for bad debts xx
Accounts receivable xx

Recovery of accounts written off

Accounts receivable xx
Allowance for bad debts xx

Cash xx
Accounts receivable xx

Aging analysis of receivables – bad debt expense is computed under the premise that the longer an amount
is past due, the more likely it is to be uncollectible.
- Higher percentage (%) will be assigned to older receivables and the lowest percentages to new receivables or to
those which are not yet due.

Practice 2:
Accrued expense
On September 1, 2015, ABC Co. issued a 6-month note to a supplier amounting to P 300,000, 12% interest per annum.
Also, there was an unpaid and unrecorded salaries at the end of the year dated December 31, 2015 amounting to P
25,000. Give the adjusting entries.

Accrued revenue
On October 1, 2015, DEF Co. received a 5-month note from a customer amounting to P 500,000, 10% interest per
annum. Record the adjusting entry as of December 31, 2015.

Prepayment
GHI Co. purchased a two-year insurance policy on August 1, 2015 for P 28,800. Give the adjusting entries as of
December 31, 2015 assuming the company uses:
a. Asset method
b. Expense method

Pre-collection
JKL Co. is engaged in constructing and renting office space to various businesses. On September 1, 2015 one tenant gave
P 240,000 cash for six month’s rent. Give the adjusting entries as of December 31, 2015 assuming the company uses:
a. Liability method
b. Revenue method

Depreciation
MNO Co. acquires a building on January 1, 2015 at a cost of P 5,500,000. The building has an estimated useful life of 40
years and an estimated salvage value of P 500,000. Record the provision for depreciation for year 2015.
 Uncollectible accounts
A company estimates that 5% of accounts receivable will be uncollectible. The total credit service revenue for the year
2015 were P 1 Million, accounts receivable as of December 31, 2015 was P 200,000, and the allowance for bad debts’
beginning balance was P 10,000. The company also wrote off P 5,000 accounts receivable which was deemed to be
worthless and recovered P 3,000 of accounts receivable previously written off. Record the adjusting entries.

PROBLEMS:

1. MagigingCPAka has two workers in her hacienda. The workers’ bi-weekly wages amount to P 5,000 for each worker for
a 5-day workweek. The wages are paid every other Friday. Last payment of wages occurred on December 27, 2018.
What adjusting entry should MagigingCPAka make on December 31, 2018 assuming that December 31, 2018 falls on
Tuesday?

TOPNOTCHERka lends cash to MATINDE amounting to P 50,000 on March 31, 2018. The loan carries 12% interest and
matures on March 31, 2015. What adjusting entry should TOPNOTCHERka make on December 31, 2018?

2. GALINGANmo paid annual rent to MASGALINGANmo amounting to P36,000 on August 1, 2014. GALINGANmo
recorded the same on a statement of financial position account. ON December 31, 2018, what would be the adjusting
entry of GALINGANmo?

3. The beginning balance of Prepaid Insurance of MATAASANGSCORE is P3,250 and its ending balance is P5,650.
MATAASANGSCORE made an adjustment at yearend by debiting a nominal account by P4,299. IF MATAASANGSCORE
made only one purchase of insurance during the year, the entry made for that purchases must be?

5. Mang BDO paid annual rent to Manong FEU amounting to P 36,000 on August 1, 2017. Mang BDO recorded the same
on a nominal account. On December 31, 2017, the adjusting entry of Mang BDO will be?

6. LABMOACCOUNTING CO. made the following adjustment on December 31, 2018:

Rental Expense 6,000
Prepaid Rental 6,000
If annual rent is paid every October 1, the original entry made last October 1 is?

7. WAGKATAMAD CO. purchased a two year business insurance worth P 26,250 on March 1, 2017 and recorded such
transaction on a real account. On December 31, 2014, the adjusting entry would involve?

8. ISAKANGMALUPET! Purchased a building on January 1, 2017 for P 90,000. The building can be sold for P 10,000 at the
end of its 20-year useful life.
a. What would be the adjusting entry pertaining to the building should ISAKANGMALUPET! make as at December 31,
2017?
b. How much is the balance of Accumulated depreciation account of ISAKANGMALUPET! as of December 31, 2018?
c. What is the book value of the building as of December 31, 2019?
d. On March 31, 2020, ISAKANGMALUPET! sold the building to MASMALUPET! for P 63,000. What is the gain or loss to
be recorded by ISAKANGMALUPET! as a result of such sale? Indicate whether it is gain or loss.

9. WAGMAHIHIYANGMAGTANONG has the following business insurance policies as of December 31, 2018:

POLICY NO. INCEPTION DATE EXPIRY TOTAL POLICY

 14344 9/1/2017 8/31/2020 P 30,000
6969 10/31/2018 11/1/2019 15,000
1928 4/1/2016 3/31/2018 9,000
P 54,000
Assuming WAGMAHIHIYANGMAGTANONG records purchases of insurance on Prepaid insurance account and adjusts
her insurance accounting every year end, the required adjusting entries on December 31, 2014 is?

10. FREECARE’s beginning allowance for bad debts is a debit of P4,500. FREECARE recognized P6,000 bad debt expense
during the year, written-off P2,500 worth of receivable and recovered P1,500 of previously written-off accounts. What
is the adjusted balance of the allowance account as of FREECARE’s year end?

11. FOCUSKASAPAPELMO’S Unearned Rent account has the following balances:

Balance beginning of year, P 11,000
Balance end of year, P 15,000

A quarterly rent received in advance is P18,000. During the year, equipment was rented to another company at an annual
rent of P9,000. The quarterly rent payments were credited to Rent Revenue, the annual equipment rental was credited
to Unearned Rent. The adjusting entry that was made to arrive at the ending balance was?

12. MADALILANGEH has unearned sales revenue account with beginning balance of P9,910 and ending balance of
P12,325. MADALILANGEH made the following adjustments during year-end:
Dec. 31, 2017
Unearned sales revenue 5,933
Sales Revenue 5,933
Total amount received from customers for advance orders during the year was?

13. Jesus is Lord Company obtained a loan from PNP Bank amounting to 420 000 on November 16, 2013. On the same
date, the company issued a 60-day, 12% promissory note to the bank. Upon closing of company’s books on December
31, 2013, the accountant must prepare an adjusting for accrued interest on issued note of?

WORKSHEET PREPARATION
PROBLEM APPLICATION:
Joey opened Super Lines Washing Co. on October 1, 2018. During October, the following transactions were completed:

Oct. 1 Invested P 80,000 cash in the business.

Purchased used delivery van for P 60,000 terms: 50% down and the balance on account.
3 Purchased cleaning supplies for P 9,000 on account.
5 Paid P 12,000 cash on one-year insurance policy. The bookkeeper charged an asset account for
this transaction.
12 Billed customers P 25,000 for washing services.
18 Paid P 10,000 cash owed on delivery van and P 5,000 owed on cleaning supplies.
20 Paid P 12,000 cash for employee salaries.
21 Collected cash from customers billed on October 12.
25 Billed customers P 30,000 for cleaning services.
31 Paid P 2,000 for a month’s expense on gas and oil of delivery van.

Withdrew P 6,000 cash for personal use.

Requirements:
a. Journalize and post the October transactions.
b. Prepare the unadjusted trial balance for October 31, 2018.
c. Journalize the following adjustments on the worksheet and complete the working papers:
(1) The estimated life of the delivery van is 10 years without salvage value.
 (2) The insurance policy is effective October 1, 2018.
(3) The unused cleaning supplies at October 31, 2018 amount to P 5,000.
(4) Salaries incurred but not yet paid as of October 31, 2018 amounted to P 6,000.
d. Prepare the following for October 31:
(1) Statement of comprehensive income
(2) Statement of changes in equity
(3) Statement of financial position
e. Journalize and post the closing entries*
f. Prepare the post-closing trial balance*

* Closing entries
 Journal entries that bring temporary accounts to zero balance and transfer their balances to the permanent
capital account at the end of the accounting period.

Query: Why is there a need to close temporary or nominal accounts?

Answer: To prevent the mixing of revenues, expenses, and withdrawal accounts of one period to the
next accounting period.

 Temporary accounts include all Statement of Comprehensive Income accounts and withdrawal account. They are
known as nominal accounts.
 Permanent accounts carry forward their ending balances to the next accounting period. They are known as real
accounts. They comprise items in the Statement of Financial Position.

Income summary account – used as another temporary account in which the revenue and the expense accounts are
closed to determine whether the business operations results to income or loss. Also known as Revenue and Expense
Summary.

 There is net income if the resulting balance of the Income summary account (after closing revenues and
expenses) is credit balance (Revenues > Expenses) otherwise, there is net loss.

Procedures in closing the nominal accounts:

1. Close all revenue accounts by debiting the amount and crediting income summary account.
2. Close all expense accounts by crediting the amount and debiting income summary account.
3. Close the balance of the income summary account to the capital account, which balance represents profit (credit
balance) or loss (debit balance) for the period.
4. Close the drawing account to the capital account.

Post-closing trial balance is prepared

 The purpose is to check the equality of debits and credits in the ledger after the adjusting and closing
entries are recorded and posted.
 At this point, the only accounts with balances are assets, contra accounts, liabilities, and capital.

11 For I know the plans I have for you,” declares the LORD,

“plans to prosper you and not to harm you,

plans to give you hope and a future.”

– Jeremiah 29:11