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

ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

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
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
Expense Method Assets Understated Expenses Overstated Prepaid Expense (A)
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
ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

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
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
ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

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 DEBIT CREDIT
Beginning Balance Cash Beginning Balance Cash
Expenses Income
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 ↑ ↑ ↑x
ADDITION
RULES

+ y = Ans + y = Ans
↑ ↑x ↓ ↓ ↓x
+ y = Ans + y = Ans
↓ ↓x ↑ ↓ ᴓx
+ y = Ans + y = Ans
↓ ↓x ↓ ↑ ᴓx
+ y = Ans + y = Ans
↑ ↑x ↑ ↑ ᴓx
SUBTRACTION

– y = Ans – y = Ans
RULES

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

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

RULES

↑ ↑(x & ∆y) ↓ ↓ ↓↓ (∆x & ∆y)

(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)
DIVISION
RULES

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

↑ ↓ ↓ ↓ ↑ (if x>y); ↓ (if x<y)
ALDRIN C. CASTRO BSBA MAJOR IN INTERNAL AUDITING 2013

(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:
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 =
Own
er’s
Equit
y NI
=
Net
Inco
me
Inc = Income
Expn = Expense
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

THEORIES
_ shee
A) _A t as
decr a
ease liabil
in ity
the _
fair A) _
An
mar expe
ket nse
valu on
e of the
an inco
asse me
t. state
B) An men
expe t
nse B) A
that liabil
is ity
incur on
red the
duri bala
ng nce
an shee
acco t
unti C) A
ng ded
peri uctio
od n
C) A from
met profi
hod t on
of the
savi state
ng men
cash t of
to own
repl er’s
ace equi
plan ty
t D) A
asse cont
ts ra
D) Add acco
ed unt
to on
the the
cost bala
of nce
equi shee
pme t
nt E) An
on addi
the tion
bala to
nce equi
shee pme
t nt
E) Sho on
wn the
on bala
the nce
bala shee
nce t
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

_ t,
A) _Salar Debi
ies t
that B) Asse
have t,
been Cred
paid it
B) SalarC) Asse
ies t,
that Debi
have t
beenD) Cont
earn ra
ed asse
by t,
empl Cred
oyee it
s butE) Liabi
not lity,
paid Cred
C) Salar it
ies _
that _A)
have D
B)
been D
C)
neit
D
D)
her
earn D
E)
ed A) D
Accu
by mula
empl ted
oyee Depr
s nor ecia
paid tion
D) SalarB) Salar
ies ies
that Paya
were ble
earn C) Depr
ed ecia
by tion
empl Expe
oyee nse
s D) Own
and er’s
have Capi
been tal
paid E) Prep
E) Salar aid
ies Insur
that ance
have _
been _Salar
A)
paid
ies
but
Paya
not
ble
earn
bein
ed
g
by
over
empl
state
oyee
d
s
B) Profi
_
t
_
D bein
A) eCont g
ra und
asse
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

ersta ity
ted acco
C) Salar unt
ies E) An
Expe asse
nse t
bein acco
g unt
und and
ersta an
ted expe
D) Total nse
Asse acco
ts unt
bein _
g A) _Asse
und ts to
ersta be
ted over
E) Total state
Asse d
ts B) Expe
bein nses
g to
over be
state over
d state
_ d
A) _Two C) Liabi
bala lities
nce to
shee be
t over
acco state
unts d
B) Two D) Liabi
inco lities
me to
state be
men und
t ersta
acco ted
unts E) An
C) A incre
bala ase
nce in
shee liabil
t ities
acco on
unt the
and bala
an nce
inco shee
me t
state _
men A) _
Total
t asse
acco ts to
unt be
D) An und
asse ersta
t ted
acco B) Total
unt expe
and nses
a to
liabil be
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

und _
erstaA) _Purc
ted hase
C) Total of
reve offic
nue e
to equi
be pme
und nt
ersta on
ted credi
D) Liabi t
lities B) Cost
to of
be empl
over oyee
state salar
d ies
E) Liabi C) Pay
lities men
to t on
be acco
und unts
ersta paya
ted ble
_ D) Repa
A) _Expir yme
atio nt of
n of princ
usef ipal
ulne of
ss of bank
equi loan
pme _
nt A) _
Acco
duri unts
ng Rece
the ivabl
acco e
unti B) Salar
ng ies
peri Paya
od ble
B) Pay C) Own
men er’s
t on Capi
acco tal
unts D) Salar
paya ies
ble Expe
C) With nse
dra _
wal _
A) Sale
of
of
cash
land
by
at
the
cost
own
for
er
cash
D) Pay
B) Servi
men
ces
t of
rend
the
ered
princ
on
ipal
credi
of a
t
loan
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

C) Colle liabil
ction ities
of C) Crea
cash tes a
on liabil
acco ity
unt for
D) Rece the
ipt com
of pany
cash D) Incre
from ases
bank the
loan asse
_ ts of
A) _Only the
duri com
ng pany
the _
adju A) _
The
stme cost
nt of
proc the
ess asse
B) To t is
prod alloc
uce ated
asse to
ts an
C) To expe
prod nse
uce acco
liabil unt
ities B) A
D) To liabil
gene ity is
rate crea
reve ted
nue C) A
_ relat
A) _
Reve ed
nue expe
B) An nse
expe acco
nse unt
C) A is
liabil redu
ity ced
D) An D) An
asse amo
t unt
is
_
tran
A) _
Incre
sferr
ases
ed
the
from
com
one
pany
asse
’s
t
Cash
acco
acco
unt
unt
to
B) Decr anot
ease her
s the
_
com
A) _
A
pany
reve
’s
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

nue C) Duri
acco ng
unt the
will slack
incre seas
ase on
B) Liabi D) On
lities July
will 31
incre _
ase A) _
The
C) One use
asse of
t equi
acco pme
unt nt
will B) The
incre incur
ase renc
and e of
anot salar
her ies
will C) The
decr expir
ease atio
D) Asse n of
ts insur
will ance
be D) The
una accr
ffect ual
ed of
_ inter
A) _
Duri est
ng _
the A) _To
peak com
of ply
the with
busy loan
seas agre
on eme
B) At nts
B)
diffe
rent To
mak
time e
s com
paris
each on
mea
year, ningf
ul
depeC) And
ndin shou
g ld
corr
on
espo
nd
the
with
the
tax
cale
cons
ndar
eque
year
nces
D) And
shou
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

ld cash
end pay
duri men
ng t is
the recei
peak ved
seas D) Adju
on sting
_ unea
A) _Syst rned
ema adve
tic rtisin
and g
ratio reve
nal nues
alloc to
atio the
n prop
B) The er
cash bala
basis nce
of at
acco the
unti end
ng of
C) Caus the
e- mon
and- th
effec _
t A) _Reco
rela rdin
tions g
hips utili
D) Accr ties
ual expe
acco nse
unti whe
ng n
___ the
B) 2Reco mon
rdin thly
g bill is
tele recei
pho ved
ne B) Reco
expe rdin
nse g
whe reve
n nue
the at
mon the
thly time
bill is pay
recei men
ved t is
C) Reco recei
rdin ved
g C) Depr
adve ecia
rtisin ting
g a
reve build
nues ing
at as
the quic
time kly
the as
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

allo inter
wed est
by _
inco A) _Art
me equi
tax pme
regu nt
latio B) Stor
ns e
D) Expe fixtu
nsin res
g aC) Com
mac pute
hine rs
in itsD) Land
entir
_
ety
A) _
The
whe
esti
n
mat
purc
ed
hase
cost
d
to
___
repl
26)
ace
Whi
the
ch of
asse
the
t
follo
wingB) The
is an origi
exa nal
mple cost
of a min
defe us
rral? accu
mula
A)
ted
TB)
depr
TC)
ecia
P
D) tion
A) L
Reco C) The
rdin esti
g mat
unre ed
cord amo
ed unt
salar for
ies whic
B) Reco h
rdin the
g asse
depr t
ecia coul
tion d be
C) Reco sold
rdin D) The
g origi
unre nal
cord cost
ed min
reve us
nue depr
D) Reco ecia
rdin tion
g expe
accr nse
ued for
the
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

curr woul
ent d be
peri over
od state
_ d
A) _Servi _
ce A) _
Und
Reve ersta
nues tem
and ent
Acco of
unts asse
Rece ts
ivabl B) Und
e ersta
B) Inter tem
est ent
Reve of
nues own
and er’s
Inter equi
est ty
PayaC) Over
ble state
C) Servi men
ce t of
Reve own
nues er’s
and equi
Une ty
arne D) Und
d ersta
Reve tem
nues ent
D) Rent of
Expe liabil
nse ities
and _
Rent A) _
Over
Paya state
ble men
_ t of
A) _
Asse profi
ts t for
woul the
d be peri
und od
erstaB) Over
ted state
B) Liabi men
lities t of
woul liabil
d be ities
und C) Und
ersta ersta
ted tem
C) Liabi ent
lities of
woul profi
d be t for
over the
state peri
d od
D) Own D) Over
er’s state
Equi men
ty t of
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

asse of
ts the
_ finan
A) _Test cial
that state
the men
ledg ts
er is _
still A) _
Prep
in aid
bala Insur
nce ance
afterB) Depr
the ecia
acco tion
unts Expe
have nse
been –
adju Equi
sted pme
B) Facili nt
tate C) Dore
prep s
arati Mari
on e
of Pate
the no,
finan With
cial dra
state wals
men D) Accu
ts mula
C) Facili ted
tate Depr
prep ecia
arati tion
on –
of Equi
the pme
adju nt
sting _
entriA) _The
es firm
D) Both reco
test rded
that P21,
the 000
ledg recei
er is ved
still from
in a
bala cust
nce ome
after r in
the adva
acco nce
unts for
have the
been deliv
adju ery
sted of
and good
facili s as
tate a
prep debi
arati t of
on P1,0
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

00 une
to qual
cash trial
and bala
a nce
credi total
t of s
P21, _
000 A) _
At
to the
sales earli
B) The est
firm acce
faile ptab
d to le
ente time
r theB) At
cost the
of lates
elect t
ricity acce
used ptab
duri le
ng time
the C) After
mon it
th as has
an been
expe earn
nse ed,
and but
all not
fails befo
to re
reco D) At
gniz the
e end
the of
P22, the
000 acco
owe unti
d to ng
Mer peri
alco od
C) All _
thes _Assig
A)
e
n
erro
reve
rs
nues
will
to
caus
the
e
peri
une
od in
qual
whic
trial
h
bala
they
nce
are
total
earn
s
ed
D) Non
B) Help
e of
to
thes
prop
e
erly
erro
mea
rs
sure
will
the
caus
peri
e
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

od’s B) Expir
profi ed
t or cost
loss C) Une
C) Brin xpire
g d
asse cost
t D) Econ
and omic
liabil reso
ity urce
acco _
unts A) _
Cons
to ump
corr tion
ect B) Dete
bala riora
nces tion
D) All C) Depr
of ecia
the tion
abov
D) Cont
e
ra
_ asse
A) _
Mat t
chin _
g _
A) A
entri
liabil
es
ity
B) Adju
B) An
sting
asse
entri
t
es
C) A
C) Corr
defe
ectin
rral
g
D) An
entri
inco
es
me
D) Cont
_
ra
_
entriA) A
es prep
aid
_
expe
A) _
Accr
nse
uals
B) An
and
accr
closi
ued
ng
expe
B) Accr
nse
ual
C) An
and
accr
defe
ued
rrals
reve
C) Trial
nue
s
D) An
and
unea
defe
rned
rrals
reve
D) Closi
nue
ng
_
and
_A
trialsA)
prep
_
aid
A) _
Asse
expe
t
nse
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

B) An D) Decr
unea ease
rned liabil
reve ities
nue _
C) An A) _Decr
accr ease
ued asse
expe ts
nse B) Decr
D) An ease
accr liabil
ued ities
reve C) Incre
nue ase
_ asse
B) _
An ts
uneaD) Incre
rned ase
reve liabil
nue ities
C) An _
accr A) _
Asse
ued t
reve and
nue inco
D) An me
accr B) Asse
ued t
expe and
nse liabil
_ ity
r_ C) Expe
A) eA nse
prep and
aid liabil
expe ity
nse D) Expe
B) An nse
unea and
rned asse
reve t
nue _
C) An A) _Expe
accr nses
ued will
reve be
nue over
D) An state
accr d
ued B) Profi
expe t will
nse be
_ und
A) _Decr ersta
ease ted
asse C) Own
ts er’s
B) Incre equi
ase ty
asse will
ts be
C) Incre over
ase state
liabil d
ities
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

D) Asse alrea
ts dy
will been
be perf
und orm
ersta ed
ted or
_ rend
A) _
Mon ered
ey _
has A) _
Debi
been ts
paid salar
but ies
no expe
servi nse
ces and
have credi
been ts
prov cash
ided B) Debi
B) Mon ts
ey salar
has ies
been paya
paid ble
for a and
servi credi
ce to ts
be salar
perf ies
orm expe
ed nse
duri C) Debi
ng ts
the salar
next ies
peri paya
od ble
C) Mon and
ey credi
has ts
been cash
[pai D) Debi
d ts
and salar
the ies
servi expe
ce nse
has and
been credi
prov ts
ided salar
D) Mon ies
ey paya
has ble
not _
beenA) _Bala
paid nce
or shee
recei t
ved B) Inco
but me
the state
servi men
ce t
has
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

C) Stat acco
eme unti
nt of ng
own peri
er’s ods
equi C) Refl
ty ectin
D) Both g
a unre
and cord
b ed
_ reve
A) _
Only nues
real earn
acco ed
unts duri
B) Only ng
nom the
inal acco
acco unti
unts ng
C) Only peri
capit od
al D) Refl
acco ectin
unts g
D) At unre
least cord
one ed
real expe
and nses
one incur
nom red
inal duri
acco ng
unt the
acco
_
unti
_A)
ng
R
B) peri
R
C) od
R
D) _
A) R
AlignA) _
An
ing exch
reco ange
rded of
cost reso
s urce
with s
appr bet
opri wee
ate n
acco two
unti depa
ng rtme
peri nts
ods in an
B) Align orga
ing niza
reco tion
rded B) A
reve chan
nues ge in
with an
appr acco
opri unt
ate bala
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

nce A) The
that deci
is sion
neit to
her start
an a
accr seco
ual nd
or a prod
defe uctio
rral n
C) An shift
adju B) The
stme reco
nt rdin
that g of
resul depr
ts in ecia
reve tion
nues on
or equi
expe pme
nses nt
bein C) The
g tran
repo sfer
rted of
in a staff
diffe to
rent anot
time her
peri depa
od rtme
from nt
the D) The
asso pay
ciate men
d t of
cash salar
flow ies
s and
D) A wag
reco es
gniti _
on A) _Selle
of r
the whe
extr n a
a cust
cash ome
flow r
s pays
relat for a
ed servi
to ce
the befo
year re
-end the
deliv servi
ery ce is
of rend
good ered
s B) Selle
and r
servi whe
ces n a
_ servi
_
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

ce is is
rend incur
ered red
befo befo
re re
recei cash
pt of is
cash paid
C) SelleD) Whe
r n an
whe expe
n a nse
servi is
ce is incur
rend red
ered as
on cash
recei is
pt of paid
cash _
D) BuyeA) _
Buye
r r
whe whe
n a n a
servi servi
ce is ce is
recei recei
ved ved
on on
pay pay
men men
t of t of
cash cash
_ B) Selle
A) _ a
By r
buye whe
r n a
whe cust
n a ome
servi r
ce is pays
recei for a
ved servi
on ce
pay befo
men re
t of the
cash servi
B) By a ce is
selle rend
r ered
whe C) Selle
n a r
servi whe
ce is n a
rend servi
ered ce is
befo rend
re ered
pay on
men recei
t of pt of
cash cash
C) WheD) Selle
n an r
expe whe
nse n a
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

serviB) Cont
ce is ribut
rend ed
ered capit
befo al on
re the
recei bala
pt of nce
cash shee
_ t
_A) C) Liabi
A
B) lities
A on
C)
the
A
D) bala
A) C
An nce
accr shee
ued t
expeD) Expe
nse nses
B) An on
accr the
ued inco
reve me
nue state
C) A men
defe t
rred _
reve A) _
Inco
nue me
D) A on
defe the
rred inco
expe me
nse state
_ men
r_ t
A) eA B) Expe
defe nses
rred on
reve the
nue inco
B) A me
defe state
rred men
expe t
nse C) Asse
C) An ts on
accr the
ued bala
reve nce
nue shee
D) An t
accr D) Liabi
ued lities
expe on
nse the
_ bala
_ nce
A) Inco
shee
me
t
on
_
the
_
inco A) Reve
me nues
state on
men the
t inco
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

me credi
state t
men B) Accu
t mula
B) Asse tion
ts on of
the inter
bala est
nce in
shee bank
t acco
C) Liabi unt
lities C) Sale
on of
the servi
bala ces
nce for
shee cash
t D) An
D) Expe inve
nses stme
on nt in
the the
inco busi
me ness
state by
men the
t own
_ er
A) _
Reve _
nuesA) _A
on cash
the with
inco dra
me wal
state by
men the
t own
B) Expe er
nses B) Expir
on atio
the n of
inco prep
me aid
state insur
men ance
t C) Inter
C) Asse est
ts on accr
the ued
bala on a
nce bank
shee loan
t D) Use
D) Liabi of
lities mac
on hine
the ry
bala duri
nce ng
shee the
t peri
_ od
A) _
Sale _
of A) _An
good asse
s on t
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

B) Own B) Prep
er’s aid
equi Adve
ty rtisin
C) A g
liabil C) Une
ity arne
D) Reve d
nue Reve
_ nues
p_ D) Land
A) r
Peri _
odici _A)
ty A
B)
assu IC)
mpti ID)
on
A) M
Equi
B) Goin
pme
g
nt
conc
purc
ern
hase
assu
d for
mpti
use
on
in
C) Fisca
the
l
busi
year
ness
assu
B) Book
mpti
keep
on
ing
D) Peri
fees
odici
colle
ty
cted
assu
but
mpti
not
on
yet
and
earn
goin
ed
g
C) Inter
conc
est
ern
earn
assu
ed
mpti
but
on
not
_
yet
A) _
Supp recei
lies ved
B) LandD) Six
C) With mon
dra ths’
wals rent
D) Note paid
s in
Paya adva
ble nce
_ _
_A) A) _
Inter
P
B) est
C
C) Rece
P ivabl
D)
e
A) P
Offic
B) Prop
e
erty
Supp
Taxe
lies
s
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

Paya a
ble credi
C) Une t to
arne an
d asse
Reve t
nuesD) Liabi
D) Cash lity
_ and
A) _
Expe a
nse credi
and t to
a a
credi reve
t to nue
an _
asse A) _
Une
t arne
B) Asse d
t Reve
and nues
a and
credi credi
t to t
a Cash
reve B) Servi
nue ce
C) Liabi Reve
lity nues
and and
a credi
credi t
t to Une
a arne
reve d
nue Reve
D) Asse nues
t C) Cash
and and
a credi
credi t
t to Une
a arne
liabil d
ity Reve
_ nues
A) _ D)
Asse Une
t arne
and d
a Reve
credi nues
t to and
a credi
liabil t
ity Servi
B) Expe ce
nse Reve
and nues
a _
crediA) _Inter
t to est
a Expe
reve nse
nue and
C) Reve a
nue credi
and t to
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

Inter _
est A) _Over
Paya state
ble men
B) Inter t of
est total
Rece liabil
ivabl ities
e B) Over
and state
a men
credi t of
t to total
Inter asse
est ts
Earn C) Und
ed ersta
C) Inter tem
est ent
Expe of
nse profi
and t
a D) Und
credi ersta
t to tem
Note ent
s of
Paya total
ble liabil
D) Inter ities
est
Expe
nse
and
a P
credi L
t to A
Cash 1) N B
_
2) D
A) _
Over 6) D
state
men 7) C
t of 8) C
liabil 1
ities 10
B) Und 19) 3A
ersta
20) B
tem
ent
of Remarks Score Rating
own Superior 81 – 85 95% - 100%
er’s
Excellent 77 – 80 90% - 95%
equi
ty Good 68 – 76 80% - 90%
C) Over Fair 65 – 67 75% - 80%
state Passing 64 75%
men
t of
profi
t
D) Und
ersta
tem
ent
of
asse
ts
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro
 Prepared by Aldrin C. Castro
Reviewer for Adjusting Entries
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:
 Prepared by Aldrin C. Castro
1. Prepare the adjusting entries
2. Prepare the Dec 1, 2011 entry to record the payment of the salaries

Reviewer for Adjusting Entries

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? Accu. Depn. – Office Eqpt. 20,000
A) 367,800 B) 375,000 C) 389,400 D) 382,200 Accounts Payable 30,000
Resultay, Capital 60,000
Use the following information to answer questions 14-18 below. The trial Service Revenues 50,000
balance for Christine Resultay Company appears as follows: Salaries Expense 10,000
Rent Expense 20,000 .
Christine Resultay Company TOTAL P 160,000 P 160,000
Trial Balance
December 31, 2011 ___ 14) If on Dec 31, 2011, supplies on hand were P2,000, the adjusting
entry would contain a
Cash 20,000 A) Debit to Supplies for P2,000
Accounts Receivable 50,000 B) Credit to Supplies for P2,000
Prepaid Insurance 5,000 C) Debit to Supplies Expense for P13,000
Supplies 15,000 D) Credit to Supplies Expense for P13,000
Office Equipment 40,000 ___ 15) If on Dec 31, 2011, the insurance still unexpired amounted to
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro
P2,000, the adjusting entry would contain a ___ 17) If as of Dec 31, 2011 the rent of P10,000 for December had not been
A) Debit to Prepaid Insurance for P3,000 recorded or paid, the adjusting entry would include a
B) Credit to Prepaid Insurance for P3,000 A) Credit to Accumulated Rent for P10,000
C) Debit to Insurance Expense for P2,000 B) Debit to Rent Payable for P10,000
D) Credit to Prepaid Insurance for P2,000 C) Debit to Rent Expense for P10,000
___ 16) If the estimated depreciation for office equipment were P20,000, D) Credit to Cash for P10,000
the adjusting entry would contain a ___ 18) If services totaling P12,500 had been performed but not yet billed,
A) Credit to Acc. Depn. – Office Eqpt. for P20,000 the adjusting entry to record this would include a
B) Credit to Depn. Expn. – Office Eqpt. for P20,000 A) Debit to Service Revenues for P12,500
C) Debit to Acc. Depn. – Office Eqpt. for P20,000 B) Credit to Unearned Service Revenues for P12,500
D) Credit to Office Equipment for P20,000 C) Credit to Service Revenues for P62,500
D) Credit to Service Revenues for P12,500
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
INITIAL ENTRY

SUBSEQUENT ENTRY

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
Accounts Receivable Cash
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
 Prepared by Aldrin C. Castro
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 Sales on Account / Credit Sales / Settlement by notes receivable
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)
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

(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

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
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro

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
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

D) Decreases both net income and working capital ___ 8) When

___ 1) Which method of recording bad debt loss is consistent with accrual the allowance method of recognizing bad debt expense is used, the entries
accounting? at the time of collection of an account previously written off would
A) Allowance method A) Decrease the allowance for doubtful accounts
B) Direct writeoff method B) Increase net income
C) Percent of sales method C) Have no effect on the allowance for doubtful accounts
D) Percent of accounts receivable method D) Have no effect on net income
___ 2) A method of estimating bad debts that focuses on the income ___ 9) An entity uses the allowance method to recognize doubtful accounts
statement rather than the statement of financial position is the allowance expense. What is the effect of a collection of an account previously written
method based on off?
A) Direct writeoff A) No effect on both allowance for doubtful accounts and doubtful
B) Aging the trade accounts receivable accounts expense
C) Credit sales B) No effect on allowance for doubtful accounts and decrease in
D) The balance in the trade accounts receivable ___ 3) A method of doubtful accounts expense
estimating uncollectible accounts that emphasizes asset valuation rather C) Increase in allowance for doubtful accounts and no effect on
than income measurement is the allowance method based on doubtful accounts expense
A) Aging the receivables D) Increase in allowance for doubtful accounts and decrease in
B) Direct writeoff doubtful accounts expense
C) Gross sales ___ 10) When an accounts receivable aging schedule is prepared, a series
D) Credit sales less returns and allowances of computations is made to determine the estimated uncollectible
___ 4) The advantage of relating an entity’s bad debt experience to accounts. The resulting amount from this aging schedule
accounts receivable is that this approach A) When added to the total accounts written off during the year is
A) Gives a reasonably accurate measurement of receivables in the the desired credit balance of the allowance for doubtful
statement of financial position accounts at year-end
B) Relates bad debt expense to the period of sale B) Is the amount of doubtful accounts expense for the year
C) Is the only generally accepted method for measuring accounts C) Is the amount that should be added to the beginning allowance
receivable for doubtful accounts to get the doubtful accounts expense for
D) Makes estimates of uncollectible accounts unnecessary ___ 5) the year
When a specific customer’s account receivable is written off as D) Is the amount of desired credit balance of the allowance for
uncollectible, what will be the effect on net income under the doubtful accounts to be reported at year end
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 PLEASE ANSWER FIRST BEFORE LOOKING AT THE ANSWERS 
method
C) No effect under allowance method and decrease under direct ANSWERS:
writeoff method 1) A 2)
D) Decrease under allowance method and no effect under direct C
writeoff method 3) A
___ 6) When the allowance method of recognizing uncollectible accounts is 4) A 5) C
used, the entry to record the writeoff of a specific account would 6) A
A) Decrease both accounts receivable and the allowance for 7) A 8) D
uncollectible accounts 9) C
B) Decrease accounts receivable and increase the allowance for 10) D
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
Reviewer for Accounts Receivable Prepared by Aldrin C. Castro
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 20,0
00
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