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

ADJUSTING ENTRIES

ACCRUALS DEFERRALS

ACCRUED REVENUES ACCRUED EXPENSES DEFERRED REVENUES DEFERRED EXPENSES

LIABILITY INCOME ASSET EXPENSE

METHOD METHOD METHOD METHOD

INITIAL ENTRY!

Cash Expense Cash Cash Asset Expense

Revenue Cash Liability Revenue Cash Cash

SUBSEQUENT ENTRY!
(adjusting entry)

Asset Expense Liability Revenue Expense Asset

Revenue Liability Revenue Liability Asset Expense
*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 Assets Overstated Expenses Understated Expense Prepaid Expense (A)
Expense Method Assets Understated Expenses Overstated Prepaid Expense (A) Expense
Depreciation Assets Overstated Expenses Understated Expense Contra Asset
Unearned Revenues:
Liability Method Liabilities Overstated Income Understated Unearned Revenues (L) Revenues
Income Method Liabilities Understated Income Overstated Revenue 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
ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

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
ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

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 Beginning Balance
Cash Expenses Income 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
↑ ↑ ↑ ↑ ↑
x + y = Ans x + y = Ans
↑ ↑ ↓ ↓ ↓
ADDITION
RULES

x + y = Ans x + y = Ans
↓ ↓ ↑ ↓ ᴓ
x + y = Ans x + y = Ans
↓ ↓ ↓ ↑ ᴓ
x + y = Ans x + y = Ans
↑ ↑ ↑ ↑ ᴓ
x – y = Ans x – y = Ans
SUBTRACTION

↑ ↓ ↓ ↓ ᴓ
RULES

x – y = Ans x – y = Ans
↓ ↓ ↑ ↓ ↑↑
x – y = Ans x – y = Ans
↓ ↓ ↓ ↑ ↓↓
x – y = Ans x – y = Ans
↑ ↑(y & ∆x) ↑ ↑ ↑↑ (∆x & ∆y)
(x) * (y) = Ans (x) * (y) = Ans
MULTIPLICATION

↑ ↑(x & ∆y) ↓ ↓ ↓↓ (∆x & ∆y)

RULES

(x) * (y) = Ans (x) * (y) = Ans

↓ ↓(y & ∆x) ↑ ↓ ↑ (if x<y); ↓ (if x>y)
(x) * (y) = Ans (x) * (y) = Ans
↓ ↓(x & ∆y) ↓ ↑ ↓ (if x<y); ↑ (if x>y)
(x) * (y) = Ans (x) * (y) = Ans
↑ ↑ ↑ ↑ ↓ (if x>y); ↑ (if x<y)
(x) / (y) = Ans (x) / (y) = Ans
↑ ↓ ↓ ↓ ↑ (if x>y); ↓ (if x<y)
DIVISION
RULES

(x) / (y) = Ans (x) / (y) = Ans

↓ ↓ ↑ ↓ ↑ (x>y or x<y)
(x) / (y) = Ans (x) / (y) = Ans
↓ ↑ ↓ ↑ ↓ (x>y or x<y)
(x) / (y) = Ans (x) / (y) = Ans
General Assumption: The amount of change should be the same

FORMULAS TO REMEMBER: P = Principal

Annual Depn = (C – SV) / L R = Rate (converted to decimal)
I = PRT T = Time (expressed in years or any equivalent amount)
F = P + I or F = P(1 + RT) F = Full Amount; also known as Maturity Value
A = L + OE A = Assets
NI = Inc – Expn L = Liabilities
OE = Owner’s Equity
C = Cost NI = Net Income
SV = Salvage Value Inc = Income
L = Useful Life Expn = Expense
I = Interest
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

THEORIES

___ 1) Depreciation is D) Payment of the principal of a loan

A) A decrease in the fair market value of an asset. ___ 12) Which of the following transactions results in an increase in
B) An expense that is incurred during an accounting period expenses?
C) A method of saving cash to replace plant assets A) Purchase of office equipment on credit
D) Added to the cost of equipment on the balance sheet B) Cost of employee salaries
E) Shown on the balance sheet as a liability C) Payment on accounts payable
___ 2) Accumulated Depreciation-Equipment, is shown as D) Repayment of principal of bank loan
A) An expense on the income statement ___ 13) Which of the following accounts is an income statement account?
B) A liability on the balance sheet A) Accounts Receivable
C) A deduction from profit on the statement of owner’s equity B) Salaries Payable
D) A contra account on the balance sheet C) Owner’s Capital
E) An addition to equipment on the balance sheet D) Salaries Expense
___ 3) Accrued salaries are ___ 14) Which of the following transactions results in an increase in
A) Salaries that have been paid revenues?
B) Salaries that have been earned by employees but not paid A) Sale of land at cost for cash
C) Salaries that have been neither earned by employees nor paid B) Services rendered on credit
D) Salaries that were earned by employees and have been paid C) Collection of cash on account
E) Salaries that have been paid but not earned by employees D) Receipt of cash from bank loan
__ 4) The type of account and normal balance of Accumulated ___ 15) Expenses are incurred
Depreciation is A) Only during the adjustment process
A) Contra asset, Debit B) To produce assets
B) Asset, Credit C) To produce liabilities
C) Asset, Debit D) To generate revenue
D) Contra asset, Credit __ 16) The cost of doing business is also known as
E) Liability, Credit A) Revenue
___ 5) The adjusting entry to record depreciation of equipment is B) An expense
A) Debit Accumulated Depreciation; Credit Depreciation Expense C) A liability
B) Debit Depreciation Expense; Credit Accumulated Depreciation D) An asset
C) Debit Equipment; Credit Accumulated Depreciation ___ 17) A customer’s promise to pay for goods or services
D) Debit Depreciation Expense; Credit Depreciation Payable A) Increases the company’s Cash account
E) Debit Accumulated Depreciation; Credit Equipment B) Decreases the company’s liabilities
___ 6) Which of the following accounts is not adjusted? C) Creates a liability for the company
A) Accumulated Depreciation D) Increases the assets of the company
B) Salaries Payable ___ 18) As the usefulness of the asset Property and Equipment expires.
C) Depreciation Expense A) The cost of the asset is allocated to an expense account
D) Owner’s Capital B) A liability is created
E) Prepaid Insurance C) A related expense account is reduced
___ 7) Failure to record the entry for accrued salaries results in D) An amount is transferred from one asset account to another
A) Salaries Payable being overstated ___ 19) When a sale takes place
B) Profit being understated A) A revenue account will increase
C) Salaries Expense being understated B) Liabilities will increase
D) Total Assets being understated C) One asset account will increase and another will decrease
E) Total Assets being overstated D) Assets will be unaffected
___ 8) An adjusting entry must contain ___ 20) Companies usually choose a fiscal year that ends
A) Two balance sheet accounts A) During the peak of the busy season
B) Two income statement accounts B) At different times each year, depending on the tax
C) A balance sheet account and an income statement account consequences
D) An asset account and a liability account C) During the slack season
E) An asset account and an expense account D) On July 31
___ 9) The entry to record expired insurance is omitted. This error causes ___ 21) Which of the following transactions is the most difficult to assign
A) Assets to be overstated to specific time periods?
B) Expenses to be overstated A) The use of equipment
C) Liabilities to be overstated B) The incurrence of salaries
D) Liabilities to be understated C) The expiration of insurance
E) An increase in liabilities on the balance sheet D) The accrual of interest
___ 10) If an accountant fails to make an adjusting entry at the end of a ___ 22) Financial statement time periods should be of equal length
fiscal period to record expired insurance, the omission will cause A) To comply with loan agreements
A) Total assets to be understated B) To make comparison meaningful
B) Total expenses to be understated C) And should correspond with the calendar year
C) Total revenue to be understated D) And should end during the peak season
D) Liabilities to be overstated ___ 23) The matching rule relates the least to
E) Liabilities to be understated A) Systematic and rational allocation
___ 11) Which of the following transactions results in the recognition of an B) The cash basis of accounting
expense? C) Cause-and-effect relationships
A) Expiration of usefulness of equipment during the accounting D) Accrual accounting
period ___ 24) Which of the following is not an application of accrual accounting?
B) Payment on accounts payable A) Recording advertising revenues at the time the work is done
C) Withdrawal of cash by the owner B) Recording telephone expense when the monthly bill is received
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

C) Recording advertising revenues at the time the cash payment is ___ 36) Which of the following errors would cause unequal totals in the
received trial balance?
D) Adjusting unearned advertising revenues to the proper balance A) The firm recorded P21,000 received from a customer in
at the end of the month advance for the delivery of goods as a debit of P1,000 to cash
___ 25) Which of the following is an application of accrual accounting? and a credit of P21,000 to sales
A) Recording utilities expense when the monthly bill is received B) The firm failed to enter the cost of electricity used during the
B) Recording revenue at the time payment is received month as an expense and all fails to recognize the P22,000
C) Depreciating a building as quickly as allowed by income tax owed to Meralco
regulations C) All these errors will cause unequal trial balance totals
D) Expensing a machine in its entirety when purchased D) None of these errors will cause unequal trial balance totals
___ 26) Which of the following is an example of a deferral? ___ 37) Under the revenue recognition principle, revenue is recorded
A) The accumulation of interest in a bank account A) At the earliest acceptable time
B) The purchase of a company vehicle B) At the latest acceptable time
C) Property taxes accrued but not yet paid C) After it has been earned, but not before
D) Legal fees already earned but not yet collected D) At the end of the accounting period
___ 27) Which of the following situations involves a deferral? ___ 38) Adjusting entries
A) Recording unrecorded salaries A) Assign revenues to the period in which they are earned
B) Recording depreciation B) Help to properly measure the period’s profit or loss
C) Recording unrecorded revenue C) Bring asset and liability accounts to correct balances
D) Recording accrued interest D) All of the above
___ 28) Which of the following assets is not subject to depreciation? ___ 39) Entries required at the end of an accounting period to bring the
A) Art equipment accounts up to date and to ensure the proper matching of income and
B) Store fixtures expenses are called
C) Computers A) Matching entries
D) Land B) Adjusting entries
___ 29) The carrying value of a depreciable asset equals C) Correcting entries
A) The estimated cost to replace the asset D) Contra entries
B) The original cost minus accumulated depreciation ___ 40) The broad classification of adjusting entries are
C) The estimated amount for which the asset could be sold A) Accruals and closing
D) The original cost minus depreciation expense for the current B) Accrual and deferrals
period C) Trials and deferrals
___ 30) Which of the following pairs of accounts would not appear in the D) Closing and trials
same adjusting entry? ___ 41) A prepaid expense is not an
A) Service Revenues and Accounts Receivable A) Asset
B) Interest Revenues and Interest Payable B) Expired cost
C) Service Revenues and Unearned Revenues C) Unexpired cost
D) Rent Expense and Rent Payable D) Economic resource
___ 31) If an adjusting entry were not made at the end of a period to ___ 42) The decrease in usefulness of property and equipment as time
remove the earned revenue from the Unearned Revenues account, passes is called
A) Assets would be understated A) Consumption
B) Liabilities would be understated B) Deterioration
C) Liabilities would be overstated C) Depreciation
D) Owner’s Equity would be overstated D) Contra asset
___ 32) A company recorded office supplies in an asset account when the ___ 43) The amount of accrued but unpaid expenses at the end of the
supplies were purchased. Failure to take an inventory and make an period is both an expense and
adjusting entry will result in an A) A liability
A) Understatement of assets B) An asset
B) Understatement of owner’s equity C) A deferral
C) Overstatement of owner’s equity D) An income
D) Understatement of liabilities ___ 44) From the view point of the firm receiving the cash, an item that
___ 33) Failure to adjust for accrued salaries at the end of the period will represents services that have been paid for by the customer, but have not
result in an yet been provided to that customer by the firm which received the cash, is
A) Overstatement of profit for the period called
B) Overstatement of liabilities A) A prepaid expense
C) Understatement of profit for the period B) An accrued expense
D) Overstatement of assets C) An accrued revenue
___ 34) An adjusted trial balance is prepared to D) An unearned revenue
A) Test that the ledger is still in balance after the accounts have ___ 45) An item that represents services that have been paid for by a firm,
been adjusted but which have not yet been received by that firm is called
B) Facilitate preparation of the financial statements A) A prepaid expense
C) Facilitate preparation of the adjusting entries B) An unearned revenue
D) Both test that the ledger is still in balance after the accounts C) An accrued expense
have been adjusted and facilitate preparation of the financial D) An accrued revenue
statements ___ 46) An item that represents services received by the firm for which it
___ 35) Which of the following accounts would normally be found on the will pay for in the future is called
credit side of the adjusted trial balance? A) A prepaid expense
A) Prepaid Insurance B) An unearned revenue
B) Depreciation Expense – Equipment C) An accrued revenue
C) Dores Marie Pateno, Withdrawals D) An accrued expense
D) Accumulated Depreciation – Equipment
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

___ 47) An item that represents services provided by a firm for which it will C) An adjustment that results in revenues or expenses being
receive payment in the future is called reported in a different time period from the associated cash
A) A prepaid expense flows
B) An unearned revenue D) A recognition of the extra cash flows related to the year-end
C) An accrued revenue delivery of goods and services
D) An accrued expense ___ 59) Which of the following events would be associated with an end-of-
___ 48) Accrued revenues period adjustment?
A) Decrease assets A) The decision to start a second production shift
B) Increase assets B) The recording of depreciation on equipment
C) Increase liabilities C) The transfer of staff to another department
D) Decrease liabilities D) The payment of salaries and wages
___ 49) Accrued expenses ___ 60) An accrued revenue should be recorded by a
A) Decrease assets A) Seller when a customer pays for a service before the service is
B) Decrease liabilities rendered
C) Increase assets B) Seller when a service is rendered before receipt of cash
D) Increase liabilities C) Seller when a service is rendered on receipt of cash
___ 50) The journal entry to record an accrued expense results in which of D) Buyer when a service is received on payment of cash
the following types of accounts being debited and credited? ___ 61) An accrued expense should be recorded
A) Asset and income A) By a buyer when a service is received on payment of cash
B) Asset and liability B) By a seller when a service is rendered before payment of cash
C) Expense and liability C) When an expense is incurred before cash is paid
D) Expense and asset D) When an expense is incurred as cash is paid
___ 51) If a P2,500 adjustment for depreciation is omitted, which of the ___ 62) A deferred revenue should be recorded by a
following financial statement errors will occur? A) Buyer when a service is received on payment of cash
A) Expenses will be overstated B) Seller when a customer pays for a service before the service is
B) Profit will be understated rendered
C) Owner’s equity will be overstated C) Seller when a service is rendered on receipt of cash
D) Assets will be understated D) Seller when a service is rendered before receipt of cash
___ 52) The word “accrued” implies which of the following? ___ 63) A deferred expense should be recorded when
A) Money has been paid but no services have been provided A) A non-cash resource is consumed after cash is paid
B) Money has been paid for a service to be performed during the B) An expense is incurred as cash is paid
next period C) A service is rendered before payment of cash
C) Money has been [paid and the service has been provided D) Cash is paid before an expense has been incurred
D) Money has not been paid or received but the service has ___ 64) The purchase of a prepaid insurance policy would initially be
already been performed or rendered recorded as
___ 53) The adjusting entry to accrue salaries expense A) An accrued expense
A) Debits salaries expense and credits cash B) An accrued revenue
B) Debits salaries payable and credits salaries expense C) A deferred revenue
C) Debits salaries payable and credits cash D) A deferred expense
D) Debits salaries expense and credits salaries payable ___ 65) Salaries and wages that are recorded as expenses at year end but
___ 54) Accumulated Depreciation is reported in the remain unpaid are an example of
A) Balance sheet A) A deferred revenue
B) Income statement B) A deferred expense
C) Statement of owner’s equity C) An accrued revenue
D) Both a and b D) An accrued expense
___ 55) Adjusting entries involve ___ 66) Deferred revenues should be reported as
A) Only real accounts A) Income on the income statement
B) Only nominal accounts B) Contributed capital on the balance sheet
C) Only capital accounts C) Liabilities on the balance sheet
D) At least one real and one nominal account D) Expenses on the income statement
___ 56) Which of the following is an example of an adjusting entry? ___ 67) Deferred expenses should be reported as
A) Recording the purchase of supplies on account A) Income on the income statement
B) Recording the billing of customers for services rendered B) Expenses on the income statement
C) Recording depreciation expense on a truck C) Assets on the balance sheet
D) Recording the payment of salaries to employees D) Liabilities on the balance sheet
___ 57) An adjusting entry to accrue salaries incurred but not yet paid is an ___ 68) Accrued revenues should be reported as
example of A) Revenues on the income statement
A) Aligning recorded costs with appropriate accounting periods B) Assets on the balance sheet
B) Aligning recorded revenues with appropriate accounting C) Liabilities on the balance sheet
periods D) Expenses on the income statement
C) Reflecting unrecorded revenues earned during the accounting ___ 69) Accrued expenses should be reported as
period A) Revenues on the income statement
D) Reflecting unrecorded expenses incurred during the accounting B) Expenses on the income statement
period C) Assets on the balance sheet
___ 58) An end-of-period adjustment involves D) Liabilities on the balance sheet
A) An exchange of resources between two departments in an ___ 70)Which of the following transactions will not result in an increase in
organization revenues?
B) A change in an account balance that is neither an accrual or a A) Sale of goods on credit
deferral B) Accumulation of interest in bank account
C) Sale of services for cash
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

D) An investment in the business by the owner ___ 83) An adjusting entry made to record accrued interest on a note
__ 71) Which of the following transactions will not result in the recognition payable due next year consists of a debit to
of an expense? A) Interest Expense and a credit to Interest Payable
A) A cash withdrawal by the owner B) Interest Receivable and a credit to Interest Earned
B) Expiration of prepaid insurance C) Interest Expense and a credit to Notes Payable
C) Interest accrued on a bank loan D) Interest Expense and a credit to Cash
D) Use of machinery during the period ___ 84) Failure to adjust for accrued Salaries at year-end will result in an
___ 72) The recording of an expense could result in a corresponding A) Overstatement of liabilities
increase in B) Understatement of owner’s equity
A) An asset C) Overstatement of profit
B) Owner’s equity D) Understatement of assets
C) A liability ___ 85) Failure to record depreciation at year-end will result in an
D) Revenue A) Overstatement of total liabilities
___ 73) The accountant may spread the cost of a building over many years B) Overstatement of total assets
primarily because of the C) Understatement of profit
A) Periodicity assumption D) Understatement of total liabilities
B) Going concern assumption
C) Fiscal year assumption
D) Periodicity assumption and going concern assumption PLEASE ANSWER FIRST BEFORE LOOKING AT THE ANSWERS! 
___ 74) Which of the following accounts would probably need to be
adjusted at year-end? ANSWERS:
A) Supplies 1) B 21) A 41) B 61) C 81) D
B) Land 2) D 22) B 42) C 62) B 82) D
C) Withdrawals 3) B 23) B 43) A 63) D 83) A
D) Notes Payable 4) D 24) C 44) D 64) D 84) C
___ 75) Which of the following transactions during the year would most 5) B 25) A 45) A 65) D 85) B
likely not need an adjusting entry at the end of the period? 6) D 26) B 46) D 66) C
A) Purchase of a two-year insurance policy 7) C 27) B 47) C 67) C
B) Cash withdrawal by the owner 8) C 28) D 48) B 68) A or B
C) Purchase of office equipment 9) A 29) B 49) D 69) B or D
D) Performance of a service that previously was paid for 10) B 30) B 50) C 70) D
___ 76) Which of the following accounts would likely not need to be 11) A 31) C 51) C 71) A
adjusted at year end? 12) B 32) C 52) D 72) C
A) Office Supplies 13) D 33) A 53) D 73) D
B) Prepaid Advertising 14) B 34) D 54) A 74) A
C) Unearned Revenues 15) D 35) D 55) D 75) B
D) Land 16) B 36) A 56) C 76) D
___ 77) Which of the following is an example of a deferral? 17) D 37) C 57) D 77) A
A) A commission collected in advance 18) A 38) D 58) C 78) C
B) Interest earned on a bank account 19) A 39) B 59) B 79) D
C) Interest expense incurred but not yet paid 20) B 40) B 60) B 80) D
D) Medical fees earned but not yet collected
___ 78) Which of the following is an example of an accrual? Remarks Score Rating
A) Equipment purchased for use in the business Superior 81 – 85 95% - 100%
B) Bookkeeping fees collected but not yet earned Excellent 77 – 80 90% - 95%
C) Interest earned but not yet received
Good 68 – 76 80% - 90%
D) Six months’ rent paid in advance
Fair 65 – 67 75% - 80%
___ 79) An adjusting entry would not include which of the following
Passing 64 75%
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
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

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 D) Credit to Supplies Expense for P13,000
balance for Christine Resultay Company appears as follows: ___ 15) If on Dec 31, 2011, the insurance still unexpired amounted to
P2,000, the adjusting entry would contain a
Christine Resultay Company A) Debit to Prepaid Insurance for P3,000
Trial Balance B) Credit to Prepaid Insurance for P3,000
December 31, 2011 C) Debit to Insurance Expense for P2,000
D) Credit to Prepaid Insurance for P2,000
Cash 20,000 ___ 16) If the estimated depreciation for office equipment were P20,000,
Accounts Receivable 50,000 the adjusting entry would contain a
Prepaid Insurance 5,000 A) Credit to Acc. Depn. – Office Eqpt. for P20,000
Supplies 15,000 B) Credit to Depn. Expn. – Office Eqpt. for P20,000
Office Equipment 40,000 C) Debit to Acc. Depn. – Office Eqpt. for P20,000
Accu. Depn. – Office Eqpt. 20,000 D) Credit to Office Equipment for P20,000
Accounts Payable 30,000 ___ 17) If as of Dec 31, 2011 the rent of P10,000 for December had not
Resultay, Capital 60,000 been recorded or paid, the adjusting entry would include a
Service Revenues 50,000 A) Credit to Accumulated Rent for P10,000
Salaries Expense 10,000 B) Debit to Rent Payable for P10,000
Rent Expense 20,000 . C) Debit to Rent Expense for P10,000
TOTAL P 160,000 P 160,000 D) Credit to Cash for P10,000
___ 18) If services totaling P12,500 had been performed but not yet billed,
___ 14) If on Dec 31, 2011, supplies on hand were P2,000, the adjusting the adjusting entry to record this would include a
entry would contain a A) Debit to Service Revenues for P12,500
A) Debit to Supplies for P2,000 B) Credit to Unearned Service Revenues for P12,500
B) Credit to Supplies for P2,000 C) Credit to Service Revenues for P62,500
C) Debit to Supplies Expense for P13,000 D) Credit to Service Revenues for P12,500
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

ACCOUNTS RECEIVABLE

I. GENERAL CLASSIFICATIONS

RECEIVABLES

TRADE RECEIVABLES NON-TRADE RECEIVABLES

 Accounts Receivable  Advances to Officers

 Notes Receivable  Advances to Affiliates
 Subscriptions Receivables
Deductions to Trade Accounts Receivables:  Special Deposits
1) Allowance for Freight Charge  Accrued Income Receivables
2) Allowance for Sales Return  Claims Receivables
3) Allowance for Sales Discount
4) Allowance for Doubtful Accounts

II. FREIGHT CHARGE

FOB DESTINATION AND FREIGHT COLLECT FOB DESTINATION AND FREIGHT COLLECT
Accounts Receivable Cash
Freight Out Sales Discounts
Sales Allowance for Freight Charge
Allowance for Freight Charge Accounts Receivable
FOB DESTINATION AND FREIGHT PREPAID FOB DESTINATION AND FREIGHT PREPAID
SUBSEQUENT ENTRY

Accounts Receivable Cash

INITIAL ENTRY

Freight Out Sales Discounts

Sales Accounts Receivable
Cash
FOB SHIPPING POINT AND FREIGHT COLLECT FOB SHIPPING POINT AND FREIGHT COLLECT
Accounts Receivable Cash
Sales Sales Discounts
Accounts Receivable
FOB SHIPPING POINT AND FREIGHT PREPAID FOB SHIPPING POINT AND FREIGHT PREPAID
Accounts Receivable Cash
Sales Sales Discounts
Cash Accounts Receivable

III. SALES DISCOUNTS

GROSS METHOD NET METHOD
Sale of merchandise Accounts Receivable Accounts Receivable
Sales Sales
Collection with discount Cash Cash
Sales Discount Accounts Receivable
Accounts Receivable
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

Collection without discount Cash Cash

Accounts Receivable Accounts Receivable
Sales Discount Forfeited

IV. ACCOUNTING FOR BAD DEBTS

ALLOWANCE METHOD DIRECT WRITE OFF METHOD
(1) Provision BDE No entry is necessary
ADA
(2) Write Off ADA BDE
AR AR
(3) Recovery AR AR
ADA BDE
Cash Cash
AR AR

Alternative Approach: Alternative Approach:

Cash Cash
ADA BDE

COMPOSITION OF THE ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE (AR)
Beginning balance Collections from customers
Recovery Settlement by notes receivable
Sales on Account / Credit Sales / Charge Sales 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)
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

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

Sales

Cash AR

SRA Cash With discount Without discount

received
Cash paid SD Cash paid AFC WO
(collections) (collections) ASR
ASD
WO Rec
SRA
(2) LEDGER ANALYSIS SD
 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 c a c
b d b 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
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

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
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

THEORIES

___ 1) Which method of recording bad debt loss is consistent with accrual B) No effect on allowance for doubtful accounts and decrease in
accounting? doubtful accounts expense
A) Allowance method C) Increase in allowance for doubtful accounts and no effect on
B) Direct writeoff method doubtful accounts expense
C) Percent of sales method D) Increase in allowance for doubtful accounts and decrease in
D) Percent of accounts receivable method doubtful accounts expense
___ 2) A method of estimating bad debts that focuses on the income ___ 10) When an accounts receivable aging schedule is prepared, a series
statement rather than the statement of financial position is the allowance of computations is made to determine the estimated uncollectible
method based on accounts. The resulting amount from this aging schedule
A) Direct writeoff A) When added to the total accounts written off during the year is
B) Aging the trade accounts receivable the desired credit balance of the allowance for doubtful
C) Credit sales accounts at year-end
D) The balance in the trade accounts receivable B) Is the amount of doubtful accounts expense for the year
___ 3) A method of estimating uncollectible accounts that emphasizes C) Is the amount that should be added to the beginning allowance
asset valuation rather than income measurement is the allowance method for doubtful accounts to get the doubtful accounts expense for
based on the year
A) Aging the receivables D) Is the amount of desired credit balance of the allowance for
B) Direct writeoff doubtful accounts to be reported at year end
C) Gross sales
D) Credit sales less returns and allowances
___ 4) The advantage of relating an entity’s bad debt experience to PLEASE ANSWER FIRST BEFORE LOOKING AT THE ANSWERS 
accounts receivable is that this approach
A) Gives a reasonably accurate measurement of receivables in the ANSWERS:
statement of financial position 1) A
B) Relates bad debt expense to the period of sale 2) C
C) Is the only generally accepted method for measuring accounts 3) A
receivable 4) A
D) Makes estimates of uncollectible accounts unnecessary 5) C
___ 5) When a specific customer’s account receivable is written off as 6) A
uncollectible, what will be the effect on net income under the allowance 7) A
and direct writeoff method? 8) D
A) No effect under both allowance method and direct writeoff 9) C
method 10) D
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
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