Adjusting Entries

ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

THEORETICAL ACCOUNTING Time Period Assumption – the process of dividing the economic life of a business into artificial time periods; also known as periodicity concept Accounting Periods

1. Calendar Year – a twelve-month period that ends on December 31 2. Natural Business Year – a twelve-month period that ends on any month when the business is at the lowest or experiencing slack season

Two Methods of Recognizing Revenues and Expenses:

1. Cash-Basis Accounting – revenue is recorded when cash is received, and an expense is recorded when cash is paid; cash-basis accounting is not in accordance with GAAP

2. Accrual Basis of Accounting – transactions that change a company’s financial statements are recorded in the periods in which the events occur; accrual basis of accounting is the principle supported by GAAP

Revenue and Expense Recognition Principles Revenue Recognition Principle – is recognized when it is probable that economic benefits will flow to the enterprise and these economic benefits can be measured reliably [PAS No. 18, Revenue] Expense Recognition Principle – expenses are recognized in the income statement when it is probable that a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen, and that the decrease in economic benefits can be measured reliably Three Broad Applications of the Matching Principle

1. Cause and Effect Association – the expense is recognized when the revenue is already recognized; also known as direct association; examples: cost of merchandise inventory, doubtful accounts, warranty expense, sales commission

2. Systematic and Rational Allocation – some costs are expensed by simply allocating them over the periods benefited; examples: depreciation of property, plant and equipment, amortization of intangibles, and allocation of prepaid rent, insurance and other prepayments

3. Immediate Recognition – the cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenue; examples: officers’ salaries and most administrative expenses, advertising and most selling expenses, amount to settle lawsuit and worthless intangibles

Adjusting Entries – involve changing account balances at the end of the period from what is the current balance of the account to what is the correct balance for proper financial reporting

Each adjusting entry affects a balance sheet account (an asset or a liability account) and an income statement account (income or expense account)

Cash should not be included in any adjusting entries that you will make Adjusting entries are necessary for three situations:

1. Prepayments 2. Accruals 3. Estimates

Characteristics of the Two General Types of Adjustments

1. Accruals – the recognition of “an expense already incurred but unpaid”, or “revenue earned but uncollected” a. This adjustment deals with an amount unrecorded in any account; the entry, in effect, increases both a balance sheet and an income

statement account b. Accruals would be required in two cases:

i. Accruing expenses to reflect expenses incurred during the accounting period that are unpaid and unrecorded ii. Accruing revenues to reflect revenues earned during the accounting period that are uncollected and unrecorded

2. Deferrals – the postponement of the recognition of “an expense already paid but not yet incurred”, or of “revenue already collected but not yet earned”; also known as prepayments

a. This adjustment deals with an amount already recorded in a balance sheet account; the entry, in effect, decreases the balance sheet account and increases an income statement account

b. Deferrals would be needed in two cases: i. Allocating assets to expense to reflect expenses incurred during the accounting period (example: prepaid insurance, supplies

and depreciation) ii. Allocating revenues received in advance to revenue to reflect revenues earned during the accounting period (example:

subscriptions) Types of Adjusting Entries

1. Accruals a. Accrued Revenues – revenues earned but not yet received in cash or recorded b. Accrued Expenses – expenses incurred but not yet paid in cash or recorded

2. Deferrals a. Prepaid Expenses – expenses paid in cash and recorded as assets before they are used or consumed; also known as deferred expense b. Unearned Revenues – cash received and recorded as liabilities before revenue is earned; also known as deferred revenues

Two Approaches for Recording Deferrals

1. Deferred Revenues – represents a liability of the business since cash was collected for service that has not been rendered yet a. Liability Method b. Income Method

2. Deferred Expense – represents an advance payment for service or expense still to be incurred or used up in the future a. Asset Method b. Expense Method

ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013 Other Terminologies

1. Book Value – the difference between the cost of a depreciable asset and its related accumulated depreciation; also known as carrying amount, carrying value, acquisition cost, or unexpired cost

2. Fair Value – the amount for which an asset could be exchanged or a liability settled, between knowledgeable and willing parties in an arm’s length transaction; also known as market value, or fair market value

HIERARCHY OF ADJUSTING ENTRIES *journal entries highlighted in red color are the journal entries used in cash-basis accounting SUMMARY OF ADJUSTING ENTRIES

Type of Adjustment Account Balances Before Adjustment Adjusting Entry

Balance Sheet Account Income Statement Account Account Debited Account Credited

Prepaid Expenses: Asset Method Expense Method

Assets Overstated Assets Understated

Expenses Understated Expenses Overstated

Expense Prepaid Expense (A)

Prepaid Expense (A) Expense

Depreciation Assets Overstated Expenses Understated Expense Contra Asset

Unearned Revenues: Liability Method Income Method

Liabilities Overstated Liabilities Understated

Income Understated Income Overstated

Unearned Revenues (L) Revenue

Revenues Unearned Revenues (L)

Accrued Expenses Liabilities Understated Expenses Understated Expense Payable (L)

Accrued Revenues Assets Understated Income Understated Receivable (A) Revenues

References:

Accounting Principles, 7th Edition, Weygandt, Kieso, Kimmel

21st Century Accounting Process, Zenaida Vera Cruz Manuel

Basic Accounting, 2011 Issue – 16th Edition, Win Ballada, CPA, MBA, Susan Ballada, CPA

Financial Accounting, Volume 1, 2012 Edition, Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

Theory of Accounts, Volume 1, 2012 Edition, Conrado T. Valix, Christian Aris M. Valix

Intermediate Accounting, Sixth Edition, J. David Spiceland, James F. Sepe, Mark W. Nelson

ADJUSTING ENTRIES

ACCRUALS DEFERRALS

ACCRUED REVENUES ACCRUED EXPENSES DEFERRED REVENUES DEFERRED EXPENSES

LIABILITY METHOD

INCOME METHOD

ASSET METHOD

EXPENSE METHOD

INITIAL ENTRY!

SUBSEQUENT ENTRY! (adjusting entry)

Cash Revenue

Expense Cash

Cash Liability

Cash Revenue

Asset Cash

Expense Cash

Asset Revenue

Expense Liability

Liability Revenue

Revenue Liability

Expense Asset

Asset Expense


PRACTICAL ACCOUNTING ACCRUALS (1) ACCRUED REVENUES Wedding R Us agreed to arrange a rush wedding for a couple on May 31. The entity intended to charge fees of P5300 for the services, which is earned but unbilled. Prepare the journal entries Solution: Accounts Receivable P 5300 Sales P 5300 (2) ACCRUED EXPENSES Accrued Salaries (this approach is also used for other similar types of accruals) An entity pays its employees every Friday with a fixed salary of P3750 per week. The entity has five employees and the December 31 cut-off happens to be a Wednesday. Prepare the journal entry to record these adjustments Solution: Salaries Expense P 11,250 Salaries Payable P 11,250 Computation: 3750 x (3/5) x 5 = 11,250 Accrued Interest Healthway Clinic issued a 45-day, 18% note for a P100,000 cash loan extended by RP Finance. The note is dated December 1, 2012. Prepare the journal entries Solution: Interest Expense P 1500 Interest Payable P 1500 Computation: 100,000 x 0.18 x (30/360) = 1,500 Depreciation Formula for Depreciation: Annual Depreciation = (Cost – Scrap Value) / Useful Life Carla Motor Repair Service acquired on Jan 1, 2012 a machinery and equipment with an estimated life of 6 years, with no scrap value, for P75,000. The building, worth P100,000, was newly constructed on March 1, 2013 with an estimated life of 10 years, scrap value of P10,000. The furniture and fixtures, worth P30,000, were acquired Jan 1, 2013 with a useful life of 10 years, scrap value of P3,000. Prepare the adjusting entries Solution: [For the machinery and equipment] Depreciation Expense – Machinery and Equipment P 12,500 Accumulated Depreciation – Machinery and Equipment P12,500 Computation: 75,000 / 6 [For the building] Depreciation Expense – Building P 7,500 Accumulated Depreciation – Building P 7,500 Computation: Annual Depreciation: (100,000 – 10,000) / 10 = 9,000 Depreciation Expense: 9,000 x (10/12) = 7,500 [For the furniture and fixtures] Depreciation Expense – Furniture and Fixtures P 2,700 Accumulated Depreciation – Furniture and Fixtures P 2,700 Computation: (30,000 – 3,000) / 10 = 2,700 DEFERRALS (1) DEFERRED REVENUES On August 1, 2013, Marasigan Company received a P48,000 check for 2 years’ rent paid in advance. Prepare the journal entry Solution:

Initial Entry: LIABILITY METHOD Initial Entry: INCOME METHOD

08/01/2013 Cash (A) P 48,000 08/01/2013 Cash (A) P 48,000

Unearned Rent Revenue (L) P 48,000 Rent Revenues (R) P 48,000

Subsequent Entry: LIABILITY METHOD Subsequent Entry: INCOME METHOD

12/31/2013 Unearned Rent Revenue (L) P 10,000 12/31/2013 Rent Revenues (R) P 38,000

Rent Revenues (R) P 10,000 Unearned Rent Revenue (L) P 38,000

Computation: 48,000 x (5/24) = 10,000 Computation: 48,000 – [48,000 x (5/24)] = 38,000

Summary of Account Balances at 12/31/2013 Summary of Account Balances at 12/31/2013

Cash (A) P 48,000 Cash (A) P 48,000

Unearned Rent Revenue (L) P 38,000 Unearned Rent Revenue (L) P 38,000

Rent Revenues (R) P 10,000 Rent Revenues (R) P 10,000

(2) DEFERRED EXPENSES On October 1, 2011, Calaguas Company acquired a 3-year insurance policy for P36,000. Prepare the journal entry Solution:

Initial Entry: ASSET METHOD Initial Entry: EXPENSE METHOD

10/01/2013 Prepaid Expense (A) P 36,000 10/01/2013 Insurance Expense (E) P 36,000

Cash (A) P 36,000 Cash (A) P 36,000


Subsequent Entry: ASSET METHOD Subsequent Entry: EXPENSE METHOD

12/31/2013 Insurance Expense (E) P 3,000 12/31/2013 Prepaid Insurance (A) P 33,000

Prepaid Expense (A) P 3,000 Insurance Expense (E) P 33,000

Computation: 36,000 x (3/36) = 3,000 Computation: 36,000 – [36,000 x (3/36)] = 33,000

Summary of Account Balances at 12/31/2013 Summary of Account Balances at 12/31/2013

Cash (A) (P 36,000) Cash (A) (P 36,000)

Prepaid Expense (A) P 33,000 Prepaid Expense (A) P 33,000

Insurance Expense (E) P 3,000 Insurance Expense (E) P 3,000

Rule of thumb for calculating the number of days: EXCLUDE the first date, INCLUDE the last date ACCOUNTING ANALYTICAL TOOLS AND TECHNIQUES (1) THE T-ACCOUNTS ANALYSIS

(for Assets and Expenses) (for Liabilities, Owner’s Equity, and Revenues)

<account title> <account title>

DEBIT CREDIT DEBIT CREDIT

Beginning Balance Cash

Expenses

Income

Beginning Balance Cash

Ending Balance Ending Balance Ending Balance Ending Balance

(2) ALGEBRAIC ANALYSIS End Bal = Beg Bal + Cash paid – Expenses Incurred End Bal = Beg Bal + Cash received – Income Accrued (3) ARITHMETIC ANALYSIS

NON-SIMULTANEOUS CHANGE SIMULTANEOUS CHANGE

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↓ ↓ ↓↓ (∆x & ∆y) (x) * (y) = Ans

↓ ↓(y & ∆x) (x) * (y) = Ans

↑ ↓ ↑ (if x<y); ↓ (if x>y) (x) * (y) = Ans

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↓ ↑ ↓ (if x<y); ↑ (if x>y) (x) * (y) = Ans

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↑ ↑ ↓ (if x>y); ↑ (if x<y) (x) / (y) = Ans

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General Assumption: The amount of change should be the same

FORMULAS TO REMEMBER: Annual Depn = (C – SV) / L I = PRT F = P + I or F = P(1 + RT) A = L + OE NI = Inc – Expn C = Cost SV = Salvage Value L = Useful Life I = Interest

P = Principal R = Rate (converted to decimal) T = Time (expressed in years or any equivalent amount) F = Full Amount; also known as Maturity Value A = Assets L = Liabilities OE = Owner’s Equity NI = Net Income Inc = Income Expn = Expense

Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

THEORIES ___ 1) Depreciation is

A) A decrease in the fair market value of an asset. B) An expense that is incurred during an accounting period C) A method of saving cash to replace plant assets D) Added to the cost of equipment on the balance sheet E) Shown on the balance sheet as a liability

___ 2) Accumulated Depreciation-Equipment, is shown as A) An expense on the income statement B) A liability on the balance sheet C) A deduction from profit on the statement of owner’s equity D) A contra account on the balance sheet E) An addition to equipment on the balance sheet

___ 3) Accrued salaries are A) Salaries that have been paid B) Salaries that have been earned by employees but not paid C) Salaries that have been neither earned by employees nor paid D) Salaries that were earned by employees and have been paid E) Salaries that have been paid but not earned by employees

__ 4) The type of account and normal balance of Accumulated Depreciation is

A) Contra asset, Debit B) Asset, Credit C) Asset, Debit D) Contra asset, Credit E) Liability, Credit

___ 5) The adjusting entry to record depreciation of equipment is A) Debit Accumulated Depreciation; Credit Depreciation Expense B) Debit Depreciation Expense; Credit Accumulated Depreciation C) Debit Equipment; Credit Accumulated Depreciation D) Debit Depreciation Expense; Credit Depreciation Payable E) Debit Accumulated Depreciation; Credit Equipment

___ 6) Which of the following accounts is not adjusted? A) Accumulated Depreciation B) Salaries Payable C) Depreciation Expense D) Owner’s Capital E) Prepaid Insurance

___ 7) Failure to record the entry for accrued salaries results in A) Salaries Payable being overstated B) Profit being understated C) Salaries Expense being understated D) Total Assets being understated E) Total Assets being overstated

___ 8) An adjusting entry must contain A) Two balance sheet accounts B) Two income statement accounts C) A balance sheet account and an income statement account D) An asset account and a liability account E) An asset account and an expense account

___ 9) The entry to record expired insurance is omitted. This error causes A) Assets to be overstated B) Expenses to be overstated C) Liabilities to be overstated D) Liabilities to be understated E) An increase in liabilities on the balance sheet

___ 10) If an accountant fails to make an adjusting entry at the end of a fiscal period to record expired insurance, the omission will cause

A) Total assets to be understated B) Total expenses to be understated C) Total revenue to be understated D) Liabilities to be overstated E) Liabilities to be understated

___ 11) Which of the following transactions results in the recognition of an expense?

A) Expiration of usefulness of equipment during the accounting period

B) Payment on accounts payable C) Withdrawal of cash by the owner

D) Payment of the principal of a loan ___ 12) Which of the following transactions results in an increase in expenses?

A) Purchase of office equipment on credit B) Cost of employee salaries C) Payment on accounts payable D) Repayment of principal of bank loan

___ 13) Which of the following accounts is an income statement account? A) Accounts Receivable B) Salaries Payable C) Owner’s Capital D) Salaries Expense

___ 14) Which of the following transactions results in an increase in revenues?

A) Sale of land at cost for cash B) Services rendered on credit C) Collection of cash on account D) Receipt of cash from bank loan

___ 15) Expenses are incurred A) Only during the adjustment process B) To produce assets C) To produce liabilities D) To generate revenue

__ 16) The cost of doing business is also known as A) Revenue B) An expense C) A liability D) An asset

___ 17) A customer’s promise to pay for goods or services A) Increases the company’s Cash account B) Decreases the company’s liabilities C) Creates a liability for the company D) Increases the assets of the company

___ 18) As the usefulness of the asset Property and Equipment expires. A) The cost of the asset is allocated to an expense account B) A liability is created C) A related expense account is reduced D) An amount is transferred from one asset account to another

___ 19) When a sale takes place A) A revenue account will increase B) Liabilities will increase C) One asset account will increase and another will decrease D) Assets will be unaffected

___ 20) Companies usually choose a fiscal year that ends A) During the peak of the busy season B) At different times each year, depending on the tax

consequences C) During the slack season D) On July 31

___ 21) Which of the following transactions is the most difficult to assign to specific time periods?

A) The use of equipment B) The incurrence of salaries C) The expiration of insurance D) The accrual of interest

___ 22) Financial statement time periods should be of equal length A) To comply with loan agreements B) To make comparison meaningful C) And should correspond with the calendar year D) And should end during the peak season

___ 23) The matching rule relates the least to A) Systematic and rational allocation B) The cash basis of accounting C) Cause-and-effect relationships D) Accrual accounting

___ 24) Which of the following is not an application of accrual accounting? A) Recording advertising revenues at the time the work is done B) Recording telephone expense when the monthly bill is received


C) Recording advertising revenues at the time the cash payment is received

D) Adjusting unearned advertising revenues to the proper balance at the end of the month

___ 25) Which of the following is an application of accrual accounting? A) Recording utilities expense when the monthly bill is received B) Recording revenue at the time payment is received C) Depreciating a building as quickly as allowed by income tax

regulations D) Expensing a machine in its entirety when purchased

___ 26) Which of the following is an example of a deferral? A) The accumulation of interest in a bank account B) The purchase of a company vehicle C) Property taxes accrued but not yet paid D) Legal fees already earned but not yet collected

___ 27) Which of the following situations involves a deferral? A) Recording unrecorded salaries B) Recording depreciation C) Recording unrecorded revenue D) Recording accrued interest

___ 28) Which of the following assets is not subject to depreciation? A) Art equipment B) Store fixtures C) Computers D) Land

___ 29) The carrying value of a depreciable asset equals A) The estimated cost to replace the asset B) The original cost minus accumulated depreciation C) The estimated amount for which the asset could be sold D) The original cost minus depreciation expense for the current

period ___ 30) Which of the following pairs of accounts would not appear in the same adjusting entry?

A) Service Revenues and Accounts Receivable B) Interest Revenues and Interest Payable C) Service Revenues and Unearned Revenues D) Rent Expense and Rent Payable

___ 31) If an adjusting entry were not made at the end of a period to remove the earned revenue from the Unearned Revenues account,

A) Assets would be understated B) Liabilities would be understated C) Liabilities would be overstated D) Owner’s Equity would be overstated

___ 32) 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 assets B) Understatement of owner’s equity C) Overstatement of owner’s equity D) Understatement of liabilities

___ 33) Failure to adjust for accrued salaries at the end of the period will result in an

A) Overstatement of profit for the period B) Overstatement of liabilities C) Understatement of profit for the period D) Overstatement of assets

___ 34) 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) Facilitate preparation of the adjusting entries D) Both test that the ledger is still in balance after the accounts

have been adjusted and facilitate preparation of the financial statements

___ 35) Which of the following accounts would normally be found on the credit side of the adjusted trial balance?

A) Prepaid Insurance B) Depreciation Expense – Equipment C) Dores Marie Pateno, Withdrawals D) Accumulated Depreciation – Equipment

___ 36) Which of the following errors would cause unequal totals in the trial balance?

A) The firm recorded P21,000 received from a customer in advance for the delivery of goods as a debit of P1,000 to cash and a credit of P21,000 to sales

B) The firm failed to enter the cost of electricity used during the month as an expense and all fails to recognize the P22,000 owed to Meralco

C) All these errors will cause unequal trial balance totals D) None of these errors will cause unequal trial balance totals

___ 37) Under the revenue recognition principle, revenue is recorded A) At the earliest acceptable time B) At the latest acceptable time C) After it has been earned, but not before D) At the end of the accounting period

___ 38) Adjusting entries A) Assign revenues to the period in which they are earned B) Help to properly measure the period’s profit or loss C) Bring asset and liability accounts to correct balances D) All of the above

___ 39) 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) Matching entries B) Adjusting entries C) Correcting entries D) Contra entries

___ 40) The broad classification of adjusting entries are A) Accruals and closing B) Accrual and deferrals C) Trials and deferrals D) Closing and trials

___ 41) A prepaid expense is not an A) Asset B) Expired cost C) Unexpired cost D) Economic resource

___ 42) The decrease in usefulness of property and equipment as time passes is called

A) Consumption B) Deterioration C) Depreciation D) Contra asset

___ 43) The amount of accrued but unpaid expenses at the end of the period is both an expense and

A) A liability B) An asset C) A deferral D) An income

___ 44) 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) A prepaid expense B) An accrued expense C) An accrued revenue D) An unearned revenue

___ 45) An item that represents services that have been paid for by a firm, but which have not yet been received by that firm is called

A) A prepaid expense B) An unearned revenue C) An accrued expense D) An accrued revenue

___ 46) An item that represents services received by the firm for which it will pay for in the future is called

A) A prepaid expense B) An unearned revenue C) An accrued revenue D) An accrued expense

Reviewer for Adjusting Entries Prepared by Aldrin C. Castro ___ 47) An item that represents services provided by a firm for which it will receive payment in the future is called

A) A prepaid expense B) An unearned revenue C) An accrued revenue D) An accrued expense

___ 48) Accrued revenues A) Decrease assets B) Increase assets C) Increase liabilities D) Decrease liabilities

___ 49) Accrued expenses A) Decrease assets B) Decrease liabilities C) Increase assets D) Increase liabilities

___ 50) The journal 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

___ 51) 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

___ 52) The word “accrued” implies which of the following? A) Money has been paid but no services have been provided B) Money has been paid for a service to be performed during the

next period C) Money has been [paid and the service has been provided D) Money has not been paid or received but the service has

already been performed or rendered ___ 53) The adjusting entry to accrue salaries expense

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

___ 54) Accumulated Depreciation is reported in the A) Balance sheet B) Income statement C) Statement of owner’s equity D) Both a and b

___ 55) Adjusting entries involve A) Only real accounts B) Only nominal accounts C) Only capital accounts D) At least one real and one nominal account

___ 56) Which of the following is an example of an adjusting entry? A) Recording the purchase of supplies on account B) Recording the billing of customers for services rendered C) Recording depreciation expense on a truck D) Recording the payment of salaries to employees

___ 57) 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 ___ 58) An end-of-period adjustment involves

A) An exchange of resources between two departments in an organization

B) A change in an account balance that is neither an accrual or a deferral

C) An adjustment that results in revenues or expenses being reported in a different time period from the associated cash flows

D) A recognition of the extra cash flows related to the year-end delivery of goods and services

___ 59) Which of the following events would be associated with an end-of-period adjustment?

A) The decision to start a second production shift B) The recording of depreciation on equipment C) The transfer of staff to another department D) The payment of salaries and wages

___ 60) An accrued revenue should be recorded by a A) Seller when a customer pays for a service before the service is

rendered B) Seller when a service is rendered before receipt of cash C) Seller when a service is rendered on receipt of cash D) Buyer when a service is received on payment of cash

___ 61) An accrued expense should be recorded A) By a buyer when a service is received on payment of cash B) By a seller when a service is rendered before payment of cash C) When an expense is incurred before cash is paid D) When an expense is incurred as cash is paid

___ 62) A deferred revenue should be recorded by a A) Buyer when a service is received on payment of cash B) Seller when a customer pays for a service before the service is

rendered C) Seller when a service is rendered on receipt of cash D) Seller when a service is rendered before receipt of cash

___ 63) A deferred expense should be recorded when A) A non-cash resource is consumed after cash is paid B) An expense is incurred as cash is paid C) A service is rendered before payment of cash D) Cash is paid before an expense has been incurred

___ 64) The purchase of a prepaid insurance policy would initially be recorded as

A) An accrued expense B) An accrued revenue C) A deferred revenue D) A deferred expense

___ 65) Salaries and wages that are recorded as expenses at year end but remain unpaid are an example of

A) A deferred revenue B) A deferred expense C) An accrued revenue D) An accrued expense

___ 66) Deferred revenues should be reported as A) Income on the income statement B) Contributed capital on the balance sheet C) Liabilities on the balance sheet D) Expenses on the income statement

___ 67) Deferred expenses should be reported as A) Income on the income statement B) Expenses on the income statement C) Assets on the balance sheet D) Liabilities on the balance sheet

___ 68) Accrued revenues should be reported as A) Revenues on the income statement B) Assets on the balance sheet C) Liabilities on the balance sheet D) Expenses on the income statement

___ 69) Accrued expenses should be reported as A) Revenues on the income statement B) Expenses on the income statement C) Assets on the balance sheet D) Liabilities on the balance sheet

___ 70)Which of the following transactions will not result in an increase in revenues?

A) Sale of goods on credit B) Accumulation of interest in bank account C) Sale of services for cash


D) An investment in the business by the owner __ 71) Which of the following transactions will not result in the recognition of an expense?

A) A cash withdrawal by the owner B) Expiration of prepaid insurance C) Interest accrued on a bank loan D) Use of machinery during the period

___ 72) The recording of an expense could result in a corresponding increase in

A) An asset B) Owner’s equity C) A liability D) Revenue

___ 73) The accountant may spread the cost of a building over many years primarily because of the

A) Periodicity assumption B) Going concern assumption C) Fiscal year assumption D) Periodicity assumption and going concern assumption

___ 74) Which of the following accounts would probably need to be adjusted at year-end?

A) Supplies B) Land C) Withdrawals D) Notes Payable

___ 75) Which of the following transactions during the year would most likely not need an adjusting entry at the end of the period?

A) Purchase of a two-year insurance policy B) Cash withdrawal by the owner C) Purchase of office equipment D) Performance of a service that previously was paid for

___ 76) Which of the following accounts would likely not need to be adjusted at year end?

A) Office Supplies B) Prepaid Advertising C) Unearned Revenues D) Land

___ 77) Which of the following is an example of a deferral? A) A commission collected in advance B) Interest earned on a bank account C) Interest expense incurred but not yet paid D) Medical fees earned but not yet collected

___ 78) Which of the following is an example of an accrual? A) Equipment purchased for use in the business B) Bookkeeping fees collected but not yet earned C) Interest earned but not yet received D) Six months’ rent paid in advance

___ 79) An adjusting entry would not include which of the following accounts?

A) Interest Receivable B) Property Taxes Payable C) Unearned Revenues D) Cash

___ 80) An adjusting entry cannot include a debit to a(n) A) Expense and a credit to an asset B) Asset and a credit to a revenue C) Liability and a credit to a revenue D) Asset and a credit to a liability

___ 81) An adjusting entry can include a debit to a(n) A) Asset and a credit to a liability B) Expense and a credit to a revenue C) Revenue and a credit to an asset D) Liability and a credit to a revenue

___ 82) The adjustment for that portion of revenue received in advance which now has been earned is to debit

A) Unearned Revenues and credit Cash B) Service Revenues and credit Unearned Revenues C) Cash and credit Unearned Revenues D) Unearned Revenues and credit Service Revenues

___ 83) An adjusting entry made to record accrued interest on a note payable due next year consists of a debit to

A) Interest Expense and a credit to Interest Payable B) Interest Receivable and a credit to Interest Earned C) Interest Expense and a credit to Notes Payable D) Interest Expense and a credit to Cash

___ 84) Failure to adjust for accrued Salaries at year-end will result in an A) Overstatement of liabilities B) Understatement of owner’s equity C) Overstatement of profit D) Understatement of assets

___ 85) Failure to record depreciation at year-end will result in an A) Overstatement of total liabilities B) Overstatement of total assets C) Understatement of profit D) Understatement of total liabilities

PLEASE ANSWER FIRST BEFORE LOOKING AT THE ANSWERS! ANSWERS: 1) B 21) A 41) B 61) C 81) D 2) D 22) B 42) C 62) B 82) D 3) B 23) B 43) A 63) D 83) A 4) D 24) C 44) D 64) D 84) C 5) B 25) A 45) A 65) D 85) B 6) D 26) B 46) D 66) C 7) C 27) B 47) C 67) C 8) C 28) D 48) B 68) A or B 9) A 29) B 49) D 69) B or D 10) B 30) B 50) C 70) D 11) A 31) C 51) C 71) A 12) B 32) C 52) D 72) C 13) D 33) A 53) D 73) D 14) B 34) D 54) A 74) A 15) D 35) D 55) D 75) B 16) B 36) A 56) C 76) D 17) D 37) C 57) D 77) A 18) A 38) D 58) C 78) C 19) A 39) B 59) B 79) D 20) B 40) B 60) B 80) D

Remarks Score Rating

Superior 81 – 85 95% - 100%

Excellent 77 – 80 90% - 95%

Good 68 – 76 80% - 90%

Fair 65 – 67 75% - 80%

Passing 64 75%


PROBLEMS Problem #1: Accrual of Royalties Elisa Diaz Company produces computer software that Batangas Company sells. Diaz receives a royalty of 15% of sales. Batangas Company pays royalties to Diaz Company on a semi-annual basis – on May 1 for sales made in July through December of the previous year and on November 1 for sales made in January through June of the current year. Royalty expense for Batangas Company and royalty income for Diaz Company in the amount of P600,000 were accrued on December 31, 2010. Cash in the amounts of P600,000 and P1,000,000 was paid and received on May 1 and Nov 1, 2011, respectively. Software sales during the July to December 2011 period totaled P15,000,000. Required:

1. Calculate the amount of royalty expense for Batangas Company and royalty income for Diaz during 2011. 2. Record the adjusting entry that each company made on December 31, 2011

Problem #2: Accrual of Interest Expense Florenda Quino Forwarders borrowed P600,000 from the bank on Sept 1, 2011. The note carried an 8% annual rate of interest and was set to mature on Feb 28, 2012. Interest and principal were paid in cash on the maturity date. Required:

1. What was the amount of interest expense paid in cash in 2011? 2. What was the amount of interest expense recognized on the 2011 income statement? 3. What was the amount of total liabilities shown on the 2011 balance sheet? 4. What was the total amount of cash that was paid to the bank on Feb 28, 2012 for principal and interest? 5. What was the amount of interest expense shown on the 2012 income statement?

Problem #3: Accrual of Interest Revenue Reynaldo San Mateo, an investor, decided to invest P1,200,000 excess cash in a certificate of deposit on April 1, 2010. The certificate carried an 8% annual rate of interest and a 1-year term to maturity. Interest will be withdrawn monthly (disregard tax effects). Required:

1. What amount of income will be recognized for the year ending Dec 31, 2010? 2. What amount of cash will be collected for interest revenue in 2010? 3. What is the amount of interest receivable as of Dec 31, 2010? 4. What amount of cash will be collected for interest revenue in 2011? 5. What amount of interest revenue will be recognized in 2011? 6. What is the amount of interest receivable as of Dec 31, 2011?

Problem #4: Adjusting Entries and Accounting Policy The following are some of the transactions made by TImoleon Lianza Cleaners during 2011 Apr. 1 Acquired cleaning supplies in the amount of P260,000. A count of the supplies on Dec 31, 2011 amounted to P110,000. Aug. 1 Received P360,000 from Cebu Company for cleaning janitorial uniforms over the next 3 years. Nov. 1 Paid P240,000 for annual rent. Required:

1. Assume that Lianza records these transactions using the following accounts, record the adjusting entries on Dec 31, 2011: (1) Office Supplies, (2) Prepaid Rent, (3) Unearned Cleaning Revenues

2. Now, assume that Lianza records these transactions using the following accounts, what will be the adjusting entries on Dec 31, 2011? (1) Office Supplies Expense, (2) Rent Expense, (3) Cleaning Revenues

3. If Lianza were to use reversing entries, which set of entries, (1) or (2), would have to be reversed? Why? Problem #5: Preparing Adjusting Entries Prepare the adjusting entry for each of the following for the year ending Dec 31, 2011:

a. The payment of the P19,000 insurance premium for two years in advance was originally recorded as Prepaid Insurance. One year of the policy has now expired.

b. All employees earn a total of P10,000 per day for a five-day week beginning on Monday and ending Friday. They were paid for the workweek ending Dec 24.

c. The Supplies account had a balance of P4,480 on Jan 1. During the year, P11,000 of supplies were bought. A year-end inventory showed that P6,400 worth of supplies are still on hand.

d. Equipment costing P588,000 has a useful life of five years with an P80,000 salvage value at the end of five years. Record the depreciation for the year. Problem #6: Preparing Adjusting Entries at Year-End The Gloria Dimen Company presented the following information pertaining to accounts that will need adjustments for its Nov 30, 2011 year-end financial adjustments:

a. On Oct 1, 2011, Gloria Dimen Company paid P10,800 for 6-months’ insurance premiums b. The balance in the ledger account Office Supplies amounted to P32,000. A count of the office supplies on Nov 30, 2011 totaled P12,800 c. Gloria Dimen Company received P22,800 on Nov 1, 2011 from a customer for services to be rendered during the months of November, December,

January, and February d. Gloria Dimen acquired Office Equipment costing P352,800 on Apr 1, 2011. The equipment is expected to last 5 years after which it will be worthless e. Assume that Nov 30, 2011 is a Friday and that Gloria Dimen pays its employees a total of P87,500 on Saturday

Required: 1. Prepare the adjusting entries 2. Prepare the Dec 1, 2011 entry to record the payment of the salaries

Reviewer for Adjusting Entries Prepared by Aldrin C. Castro Problem #7: Analyzing Accounts The income statement for Narciso Gabayan Company included the following expenses for 2011 Rent Expense P 780,000 Interest Expense 117,000 Salaries Expense 1,245,000 Listed below are the related balance sheet account balances at year end for last year and this year. 2010 2011 Prepaid Rent ------------ P 13,500 Interest Payable P 18,000 ------------ Salaries Payable 75,000 114,000 Required:

1. Compute the cash paid for rent during 2011 2. Compute the cash paid for interest during 2011 3. Compute the cash paid for salaries during 2011

Problem #8 Reynante Rivera Company bought equipment on January 3 of this year for P100,000. At the time of purchase, the equipment was estimated to have a useful life on nine years and a trade-in value of P10,000 at the end of nine years. Using the straight-line method, the amount of one year’s depreciation is A) 11,110 B) 12,220 C) 90,000 D) 10,000 E) 20,000 Problem #9 If equipment cost P200,000 and accumulated depreciation amounts to P60,000, the book value of the equipment is A) 260,000 B) 60,000 C) 140,000 D) 200,000 Problem #10 A law firm began November with office supplies of P16,000. During the month, the firm purchased supplies of P29,000. On November 30, supplies on hand totaled P21,000. Supplies expense for the period is A) 21,000 B) 24,000 C) 29,000 D) 45,000 Problem #11 A company has P1,500 of supplies on hand at the end of 2010. During 2011, P2,750 of supplies were purchased. A count of supplies on hand at the end of 2011 found an inventory of P875. What was the amount of supplies expense for 2011? A) 1,875 B) 5,125 C) 3,375 D) 4,250 Problem #12 At the beginning of 2010, a company purchased a fire insurance policy covering a property for a period of two years. The P5,600 cost of the policy was paid in cash. At the end of 2010, the company will reduce Prepaid Insurance for this policy by: A) 0 B) 467 C) 5,600 D) 2,800 Problem #13 A company that pays employees every two weeks has paid workers P375,000 in wages and salaries for work completed during 2010. In addition, the employees earned one week’s salary of P7,200 at the end of December that will be paid as part of the P14,400 payroll at the end of the first week of January in 2011. How much should the company report for salaries and wages expense for 2010? A) 367,800 B) 375,000 C) 389,400 D) 382,200 Use the following information to answer questions 14-18 below. The trial balance for Christine Resultay Company appears as follows:

Christine Resultay Company Trial Balance

December 31, 2011

Cash 20,000 Accounts Receivable 50,000 Prepaid Insurance 5,000 Supplies 15,000 Office Equipment 40,000 Accu. Depn. – Office Eqpt. 20,000 Accounts Payable 30,000 Resultay, Capital 60,000 Service Revenues 50,000 Salaries Expense 10,000 Rent Expense 20,000 . TOTAL P 160,000 P 160,000 ___ 14) If on Dec 31, 2011, supplies on hand were P2,000, the adjusting entry would contain a

A) Debit to Supplies for P2,000 B) Credit to Supplies for P2,000 C) Debit to Supplies Expense for P13,000

D) Credit to Supplies Expense for P13,000 ___ 15) If on Dec 31, 2011, the insurance still unexpired amounted to P2,000, the adjusting entry would contain a

A) Debit to Prepaid Insurance for P3,000 B) Credit to Prepaid Insurance for P3,000 C) Debit to Insurance Expense for P2,000 D) Credit to Prepaid Insurance for P2,000

___ 16) If the estimated depreciation for office equipment were P20,000, the adjusting entry would contain a

A) Credit to Acc. Depn. – Office Eqpt. for P20,000 B) Credit to Depn. Expn. – Office Eqpt. for P20,000 C) Debit to Acc. Depn. – Office Eqpt. for P20,000 D) Credit to Office Equipment for P20,000

___ 17) If as of Dec 31, 2011 the rent of P10,000 for December had not been recorded or paid, the adjusting entry would include a

A) Credit to Accumulated Rent for P10,000 B) Debit to Rent Payable for P10,000 C) Debit to Rent Expense for P10,000 D) Credit to Cash for P10,000

___ 18) If services totaling P12,500 had been performed but not yet billed, the adjusting entry to record this would include a

A) Debit to Service Revenues for P12,500 B) Credit to Unearned Service Revenues for P12,500 C) Credit to Service Revenues for P62,500 D) Credit to Service Revenues for P12,500

Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

ACCOUNTS RECEIVABLE

I. GENERAL CLASSIFICATIONS

II. FREIGHT CHARGE

INIT

IAL

ENTR

Y

FOB DESTINATION AND FREIGHT COLLECT

SUB

SEQ

UEN

T EN

TRY

FOB DESTINATION AND FREIGHT COLLECT

Accounts Receivable Freight Out Sales Allowance for Freight Charge

Cash Sales Discounts Allowance for Freight Charge Accounts Receivable

FOB DESTINATION AND FREIGHT PREPAID FOB DESTINATION AND FREIGHT PREPAID

Accounts Receivable Freight Out Sales Cash

Cash Sales Discounts Accounts Receivable

FOB SHIPPING POINT AND FREIGHT COLLECT FOB SHIPPING POINT AND FREIGHT COLLECT

Accounts Receivable Sales


FOB SHIPPING POINT AND FREIGHT PREPAID FOB SHIPPING POINT AND FREIGHT PREPAID

Accounts Receivable Sales Cash


III. SALES DISCOUNTS

GROSS METHOD NET METHOD

Sale of merchandise Accounts Receivable Sales

Accounts Receivable Sales

Collection with discount Cash Sales Discount Accounts Receivable

Cash Accounts Receivable

RECEIVABLES

TRADE RECEIVABLES NON-TRADE RECEIVABLES

Accounts Receivable

Notes Receivable Advances to Officers

Advances to Affiliates

Subscriptions Receivables

Special Deposits

Accrued Income Receivables

Claims Receivables

Deductions to Trade Accounts Receivables: 1) Allowance for Freight Charge 2) Allowance for Sales Return 3) Allowance for Sales Discount 4) Allowance for Doubtful Accounts


Collection without discount Cash Accounts Receivable

Cash Accounts Receivable Sales Discount Forfeited

IV. ACCOUNTING FOR BAD DEBTS

ALLOWANCE METHOD DIRECT WRITE OFF METHOD

(1) Provision BDE ADA

No entry is necessary

(2) Write Off ADA AR

BDE AR

(3) Recovery AR ADA Cash AR Alternative Approach: Cash ADA

AR BDE Cash AR Alternative Approach: Cash BDE

COMPOSITION OF THE ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE (AR)

Beginning balance Recovery

Sales on Account / Credit Sales / Charge Sales

Collections from customers Settlement by notes receivable Sales returns and allowances Sales discounts Write off Recovery

Ending Balance (Gross AR)

COMPOSITION OF THE ALLOWANCE FOR DOUBTFUL ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS (ADA)

Write off Beginning balance Provision Recovery Doubtful Accounts Expense or BDE year end adjustment

Ending Balance / Required Allowance (RA)

V. METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

(1) Aging of Accounts Receivable RA = Balance x Experience Rate of Percent Uncollectible DAE = RA – allowance before adjustment (credit balance) DAE = RA + allowance before adjustment (debit balance)

(2) Percent of Accounts Receivable RA = Rate x AR DAE = RA – allowance before adjustment (credit balance)


DAE = RA + allowance before adjustment (debit balance) Rate = (ADA / AR) x 100

(3) Percent of Sales Rate = BDE / S Net Credit Sales = S – (SRA + SD) DAE = Rate x Sales

VI. NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLES

Accounts Receivable (gross) Less: Allowance for Freight Charge Allowance for Sales Return Allowance for Sales Discount Allowance for Doubtful Accounts Accounts Receivable (net) VII. ACCOUNTING TECHNIQUES FOR ANALYSIS (1) BRANCH ANALYSIS

Demonstrates the relationship of accounts specifically the (1) Sales, (2) AR, (3) Cash, (4) SRA, (5) SD, (6) ADA, and other sub-entries

The primary purpose is the decomposition of broad accounting terminology to its specific and easily identifiable terms

(2) LEDGER ANALYSIS

Demonstrates the relationship of journal entry transactions to a specific ledger account

The primary purpose is to allow visualization of the problem which permits translation to mathematical equations and algebraic manipulations

(normal balance = debit) (normal balance = credit)

a b

c d

a b

c d

e e

Case 1: If (a + b) > (c + d) Then Case 2: If (a + b) < (c + d) Then (a + b) – (c + d) = e (c + d) – (a + b) = e

Sales

AR

With discount Without discount

Cash paid (collections)

SD Cash paid (collections)

AFC ASR ASD SRA SD

Cash

SRA Cash received

WO

WO Rec


Consequently, any part of this literal equation can be solved using algebraic rules as a tool for manipulation. Sources and References:

Financial Accounting Volume One (2012); Condrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

Practical Accounting One (2011); Condrado T. Valix, Christian Aris M. Valix

Theory of Accounts Volume One (2012); Condrado T. Valix, Christian Aris M. Valix

Basic Accounting (2011); Win Ballada, Susan Ballada

Accounting Principles (7th Edition); Weygandt, Kieso, Kimmel


THEORIES ___ 1) Which method of recording bad debt loss is consistent with accrual accounting?

A) Allowance method B) Direct writeoff method C) Percent of sales method D) Percent of accounts receivable method

___ 2) A method of estimating bad debts that focuses on the income statement rather than the statement of financial position is the allowance method based on

A) Direct writeoff B) Aging the trade accounts receivable C) Credit sales D) The balance in the trade accounts receivable

___ 3) A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on

A) Aging the receivables B) Direct writeoff C) Gross sales D) Credit sales less returns and allowances

___ 4) The advantage of relating an entity’s bad debt experience to accounts receivable is that this approach

A) Gives a reasonably accurate measurement of receivables in the statement of financial position

B) Relates bad debt expense to the period of sale C) Is the only generally accepted method for measuring accounts

receivable D) Makes estimates of uncollectible accounts unnecessary

___ 5) When a specific customer’s account receivable is written off as uncollectible, what will be the effect on net income under the allowance and direct writeoff method?

A) No effect under both allowance method and direct writeoff method

B) Decrease under both allowance method and direct writeoff method

C) No effect under allowance method and decrease under direct writeoff method

D) Decrease under allowance method and no effect under direct writeoff method

___ 6) When the allowance method of recognizing uncollectible accounts is used, the entry to record the writeoff of a specific account would

A) Decrease both accounts receivable and the allowance for uncollectible accounts

B) Decrease accounts receivable and increase the allowance for uncollectible accounts

C) Increase the allowance for uncollectible accounts and decrease net income

D) Decrease both accounts receivable and net income ___ 7) When an entity uses the allowance method for recognizing uncollectible accounts, the entry to record the writeoff of a specific uncollectible account

A) Affects neither net income nor working capital B) Affects neither net income nor accounts receivable C) Decreases both net income and accounts receivable D) Decreases both net income and working capital

___ 8) When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would

A) Decrease the allowance for doubtful accounts B) Increase net income C) Have no effect on the allowance for doubtful accounts D) Have no effect on net income

___ 9) An entity uses the allowance method to recognize doubtful accounts expense. What is the effect of a collection of an account previously written off?

A) No effect on both allowance for doubtful accounts and doubtful accounts expense

B) No effect on allowance for doubtful accounts and decrease in doubtful accounts expense

C) Increase in allowance for doubtful accounts and no effect on doubtful accounts expense

D) Increase in allowance for doubtful accounts and decrease in doubtful accounts expense

___ 10) When an accounts receivable aging schedule is prepared, a series of computations is made to determine the estimated uncollectible accounts. The resulting amount from this aging schedule

A) When added to the total accounts written off during the year is the desired credit balance of the allowance for doubtful accounts at year-end

B) Is the amount of doubtful accounts expense for the year C) Is the amount that should be added to the beginning allowance

for doubtful accounts to get the doubtful accounts expense for the year

D) Is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year end

PLEASE ANSWER FIRST BEFORE LOOKING AT THE ANSWERS ANSWERS: 1) A 2) C 3) A 4) A 5) C 6) A 7) A 8) D 9) C 10) D

Reviewer for Accounts Receivables Prepared by Aldrin C. Castro

PROBLEMS Problem #1 The following data are available on December 31, 2012 for Naïve Company: Sales 8,000,000 Accounts Receivable 2,000,000 Allowance for Doubtful Accounts – January 1 100,000 Accounts written off 130,000 Recovery of accounts previously written off 20,000 Required: Prepare the adjusting entry for doubtful accounts under each of the following method:

a. Percentage of sales – The estimate is 3% b. Percentage of accounts receivable – The estimate is 8% c. Aging – The estimate is P200,000

Problem #2 Orr Company prepared an aging of accounts receivable on December 31, 2011 and determined that the net realizable value of the accounts receivable was P2,500,000. Additional information is available as follows: Allowance for Doubtful Accounts on January 1 280,000 Accounts written off as uncollectible 230,000 Accounts Receivable on December 31 2,700,000 Uncollectible accounts recovery 50,000 For the year ended December 31, 2011, what amount should be recognized as doubtful accounts expense? A) 230,000 B) 200,000 C) 150,000 D) 100,000 Problem #3 Roanne Company uses the allowance method of accounting for uncollectible accounts. During 2011, Roanne had charged P800,000 to bad debt expense, and wrote off accounts receivable of P900,000 as uncollectible. What was the decrease in working capital? A) 900,000 B) 800,000 C) 100,000 D) 0 Problem #4 Mill Company’s allowance for doubtful accounts was P1,000,000 at the end of 2011 and P900,000 at the end of 2010. For the year ended December 31, 2011, Mill reported doubtful accounts expense of P160,000 in its income statement. What amount did Mill debit to the appropriate account in 2011 to write off uncollectible accounts? A) 60,000 B) 100,000 C) 160,000 D) 260,000 Problem #5 The following information pertains to Tara Company’s accounts receivable on December 31, 2011: Days Outstanding Estimated Amount Estimated Uncollectible 0 – 60 1,200,000 1% 61 – 120 900,000 2% Over 120 1,000,000 60,000 During 2011, Tara wrote off P70,000 in accounts receivable and recovered P40,000 that had been written off in prior years. Tara’s January 1, 2011, allowance for uncollectible accounts was P100,000 Under the aging method, what amount of allowance for uncollectible accounts should Tara report on December 31, 2011? A) 90,000 B) 100,000 C) 130,000 D) 190,000 Problem #6 The following accounts were abstracted from Manchester Company’s unadjusted trial balance on December 31, 2011: Debit Credit Accounts Receivable 5,000,000 Allowance for Doubtful Accounts 40,000 Net Credit Sales 20,000,000 Manchester estimates that 3% of the gross accounts receivable will become uncollectible. What amount should be recognized as doubtful accounts expense for 2011? A) 110,000 B) 150,000 C) 190,000 D) 600,000 Problem #7 Barr Company showed the following at year-end: Allowance for doubtful accounts (debit balance) (16,000) Net sales 7,100,000 Barr estimates its uncollectible receivables at 2% of net sales. What is the allowance for doubtful accounts at year end? A) 158,000 B) 144,500 C) 142,000 D) 126,000 Problem #8 Capetown Company began operations on January 1, 2010. Capetwon has found that its estimated bad debt expense has been consistently higher than actual bad debts. Management proposes lowering the percentage from 3% of credit sales to 2%. Credit sales for 2011 totaled P5,000,000, and accounts written off as uncollectible during 2011 totaled P550,000. What is the bad debt expense for 2011? A) 150,000 B) 100,000 C) 550,000 D) 240,000

Adjusting Entries

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