Exercise 4-1

Quick Company paid PHP 25,920 premium on a three-year insurance policy on

September 1, 2019. The efficacy of the policy begins on September 1, 2019.

1. Assuming the cash basis of accounting, how much of the premium will appear as an
expense on the annual statement of comprehensive income for 2019? For 2020? For
2021? For 2022?

2. Assuming the cash basis, how much of the premium will appear as an asset on each
December 31 statement of financial position for the year 2019? For 2020? For 2021?
For 2022?

3. Assuming the accrual basis of accounting, how much of the premium will appear as
an expense on the annual statement of comprehensive income for the year? For 2020?
For 2021? For 2022?

4. Assuming the accrual basis, how much of the premium will appear as an asset on
each December 31 statement of financial position for the year 2019? For 2020? For
2021? For 2022?

2019 2020 2021 2022

1. 25, 920 0 0 0

2. 0 0 0 0

3. 2,880 8,640 8,640 5,760

4. 23,040 14,400 5,760 0

Exercise 4-2

Determine the amounts indicated by the question marks in the column below. Consider
each column a separate problem. Make the adjusting entry for column (a) assuming
supplies purchased are debited to an asset account.

a b c d

Supplies on hand, August 1 264 434 196 PHP 892

Supplies purchased during the 52 PHP 974 174 1,928

month

Supplies consumed during the 194 972 PHP 314 1,632

month

Supplies remaining on August 31 PHP 122 436 56 1,188

Exercise 4-3

Classify the following items as (a) deferred expense (prepaid expense), (b) deferred
revenue (unearned revenue), (c) accrued expense (accrued liability), or (d) accrued
revenue (accrued asset). USE CAPITAL LETTERS.

1. A two-year premium paid on a fire insurance policy.

Answer: A.
2. Electric bill owed but not yet paid.
Answer: C.
3. Office Supplies on hand
Answer: A.
4. Wages owed but not yet paid
Answer: C.
5. Telephone bill owed but payable in the following period
Answer: C.
6. Subscriptions collected in advance by a newspaper publisher
Answer: A.
7. Service Revenue collected but not yet earned
Answer: B.
8. Service Revenue already earned but not yet received
Answer: D.
9. Interest paid in advance from a bank loan
Answer: A.
10. Rent received in advance
Answer: A.
11. Services rendered but not yet collected
Answer: D.
12. Advertising contract paid in advance for one year
Answer: A.
13. Income collected but not yet earned
Answer: B.
14. Rent paid in advance
Answer: A.
15. Interest collected in advance by the creditor
Answer: A.
Exercise 4-4

The supplies and supplies expense accounts on December 31, after adjusting entries
have been posted at the end of the first year of operations, are shown in the T-accounts
below:

Determine the amount of supplies purchased during the year. PHP 11, 805

Exercise 4-5

At the end of the current year, Php 21,780 of fees had been earned but had not been
billed to clients.

a. Journalize the adjusting entry to record the accrued fees.

Date Account Name Debit Credit

Dec 31, Accounts Receivable 21,780

2020

Unearned Revenue 21,780

b. If the cash basis rather than the accrual basis had been used, would an adjusting
entry have been necessary? Explain.
Answer: No, because when using the cash basis of accounting, revenues are
recognized only when the money has been received. As a result, accrued revenue
would not be recorded in the accounts, and no adjusting entry would actually be
needed.

Exercise 4-7

Prepare the adjusting entries on December 31, 2019, the end of the annual accounting
on the following independent data. Show your computations after each entry.

1. The Insurance Expense account had a debit balance of on December 31, 2019, of P
36,000 representing the premium for a 2-year fire insurance policy effective October 1,
2019.

2. Rent Income was credited for P 18,000 on November 1, 2019, representing nine
months of rent collected in advance.

3. Equipment per the general ledger on December 31, 2019, shows a balance of P
372,000. Equipment acquired during the year was P 52,000 on April 1, 2019. All
equipment is to be depreciated at the rate of 25% per annum.

4. As of December 31, 2019, commissions already earned but not yet collected
amounted to P 48,000.

5. Office Supplies costing P 9,000 bought during the period were debited to the Office
Supplies account. Of the amount, P 5,000 were consumed during the year.

6. Unearned Service Fees account showed a credit balance of P 80,000 per general
ledger on December 31. Of this, 40% had been actually earned during the period.

7. On December 31, 2019, a 90-day, 9% Notes Payable has a balance of P 120,000 per
general ledger. The note was issued on December 5, 2019. No interest has been taken
on this note.

8. Unearned service revenue has a balance of P 400,000 of which 60% has been
earned.

9. Notes Receivable has a balance of P 100,000 received from a client in settlement of

an open account on November 16, 2019. The note is a 90-day, 12% note. No interest
has been taken on this note.
10. The Prepaid Insurance account has a balance of P 210,000 on December 31, 2019.
The balance represented two fire insurance policies acquired in 2019. The first policy,
Policy I for P 120,000 was acquired on March 1, 2019, and the second policy, Policy II
was acquired on August 1, 2019, for P 90,000. Policy I is payment for a 2-year plan
while Policy II is for a one-year plan.

Date Account Title Debit Credit

Dec 31,
2019

Prepaid Insurance 4,500

Insurance Expense 4,500

{36,000/24(2 years)=1,500 x 3 (months) =

4,500}

Cash 18,000

Accrued Rent Income 18,000

Depreciation Expense 102,750

Accumulated Depreciation 102,750

[{372,000 x 0.25(rate per annum)} +

{52,000 x 0.25 x 9/12(months left since
April 1 over 12 months)}=102,750]

Commission Receivable 48,000

Commission Revenue 48,000

Office Supplies Expense 5,000

Office Supplies 5,000

Unearned Revenue 32,000

Service Fee 32,000

{80,000 x 0.4 (rate per annum) = 32,000}

Interest Expense 3,120

Interest Payable 3,120

{120,000 x 0.09 (rate per annum) x

26/90(days from Dec 5 to Dec 31 over 90
days) = 3,120}

Unearned Service Revenue 240,000

Service Revenue 240,000

{400,000 x 0.6 (rate per annum) =

240,000}

Interest Receivable 6,000

Interest Income

{100,000 x 0.12 (rate per annum) x 45/90 6,000

(no. of days from Nov 16 to Dec 31over 90)
= 6,000}

Insurance Expense 87,500

Prepaid Insurance 87,500

[{120,000/24 (2-year plan) x 10 (months

left after March)} + {90,000/12 (1-year
plan) x 5 (months left after August)} =
87,500]
EXERCISE 4-8 Classification of Adjusting Entries

INSTRUCTION: Classify the following transaction as

A. Accrued revenue
B. Accrued expense
C. Prepaid expenses
D. Unearned revenue

1. Interest paid in advance at the time the note was discounted at the bank
Answer: C
2. Property taxes paid in advance.
Answer: C
3. Commission income received in advance.
Answer: D.
4. Rent received in advance in property owned.
Answer: D.
5. Life insurance premiums received by an Insurance company.
Answer: C
6. Supplies on hand.
Answer: C
7. Unpaid salaries to employees.
Answer: B.
8. Portion of fee earned by CPA but not due until completion of an audit.
Answer: A.
9. Interest earned but not yet received.
Answer: A.
10. Taxes owed but payable in the following month.
Answer: B.
11. Subscription collected in advance by a publisher.
Answer: D.
12. Receipts from sale of meal tickets by a restaurant.
Answer: A.
13. Interest owed but not yet due.
Answer: B.
14. A three-year premium paid on fire insurance policy.
Answer: C
15. Salary owed but not yet due.
Answer: B.
16. Uncollected service income.
Answer: A.
17. Accrued interest on notes payable.
Answer: B.
18. Paid advertising expenses for the quarter.
Answer: C
19. Collected two months deposit and one month advance on rental of an apartment.
Answer: D
20. Unrecorded interest on notes receivable.
Answer: B.

EXERCISE 4-9 Preparation of Adjusting Entries

INSTRUCTION: Only one-half of each adjusting entry has been shown in a journal form.
Complete the journal entry.

2020 Nov.

1. Interest Income is credited.

Answer: Interest receivable is debited.

2. Doubtful account expense is debited.

Answer: Allowance for doubtful accounts is credited.

3.Commission income is debited.

Answer: Commission receivable is credited.

4.Accumulated depreciation is credited.

Answer: Depreciation expense is debited.

5.Utilities expense is debited.

Answer: Utilities payable is credited.

6.Service income is credited.

Answer: Accounts receivable is debited.

7.Prepaid rent is credited.

Answer: Rent expense is debited.

8.Rent receivable is debited.

Answer: Rent income is credited.
9.Office supplies are debited.
Answer: Office supplies expenses are credited.

10.Allowance for doubtful accounts is debited.

Answer: Doubtful account expense is credited.

11.Salaries payable is credited.

Answer: Salary expense is debited.

12.Unearned rent is debited.

Answer: Cash is credited.

13.Depreciation expense is debited.

Answer: Accumulated depreciation is credited.

14. Wages expense is debited.

Answer: Wages payable is credited.

15..Prepaid insurance is credited.

Answer: Insurance expense is debited.

16.Interest expense is debited.

Answer: Interest payable is credited.

17.Interest receivable is debited.

Answer: Interest revenue is credited.

18.Unearned commission is credited.

Answer: Cash is debited.

19.Rent expense is credited.

Answer: Prepaid rent is debited.

20.Unearned interest is credited.

Answer: Cash is debited.