Adjusting Entries for Bad Debts/ Uncollectible Accounts

Practice Problem

During 2018, its first year of operations, Starlight Co. rendered janitorial services on account amounting to P1,200,000 of
which P850,000 has been collected as of the end of the year. It was estimated on December 31 that 5% of the accounts
receivable balance may prove to be uncollectible.

General Journal

2018

Dec 31 Bad Debt Expense (350,000 x 5%) 17,500

Allowance for Bad Debts 17,500

31

AR Allowance for Bad Debts Bad Debt Expense

Dr Cr Dr Cr Dr Cr

1,200,000 850,000 0 – no beg bal.

17,500 adjustments

350,000 17,500 adjusted 17,500

Notes to SFP as of Dec. 2018

Accounts Receivable 350,000

Less: Allowance for Bad Debts 17,500

Net Realizable Value 332,500

Income statement for the year ended Dec 2018

Bad Debt Expense 17,500

The following year, the company rendered services on credit for P 1,500,000 and collected P 1,400,000 of its receivables.
At year-end, Starlight estimated doubtful accounts at 7% of its account receivable.

AR Allowance for Bad Debts Bad Debt Expense

Carried over from 350,000 1,400,000 17,500

Dec. 2018 1,500,000 14,000 adjustment

As of Dec. 2019 450,000 31,500 adjusted 14000

(given)

450,000x7%= 31,500
Notes to SFP

Accounts Receivable 450,000

Less: Allowance for Bad Debts 31,500

Net Realizable Value 418,500

Income Statement for the year ended Dec. 31 2019

Doubtful Account Expense 14,000

General Journal

2019

Dec 31 Bad Debt Expense 14000

Allowance for Bad Debts 14000

Prepaid/Deferred Expense

Initial Entry:

Asset/Preferred Method – asset is debited. Pertains to FUTURE

Expense Method- expense is debited. Pertains to PAST

Adjusting Entry

Asset/Preferred Method – asset is credited

Expense Method- expense is credited

Practice Problem

On September 1, 2019, Almario Law Office issued a check amounting to 250,000 as advance rent for 10 months.

Initial Entry (Asset Method)

Sept. 1 Prepaid Rent 250,000

Cash 250,000

Adjusting Entry

Dec. 31 Rent Expense (250,000 x 4/10) 100,000

Prepaid Rent 100,000

Sept 1 250,000 100,000 (4 mons. Incurred) Dec 31 100,000

As of Dec. 31 150,000

Adjusted Bal.

Practice Problem

The prepaid advertising account of 80,000 represents an eight-month advertising contract entered into by the company
on Oct. 1, 2019

Initial Entry

Oct. 1 Prepaid Advertising 80,000

Cash 80,000

Adjusting Entry

Advertising Expense 30,000

Prepaid Advertising 30,000

Some of the accounts in the unadjusted trial balance of Rosales Haircutters as of Dec. 31, 2019 are shown below.

A count of the office supplies showed 2,300 remaining on hand as of Dec 31

ACCOUNT TITLE DEBIT CREDIT

Cash 560,000

Accounts Receivable 830,000

Allowance for Bad Debts 35,000

Prepaid Insurance 28,000

Accounts Payable 550,000

Rosales, Capital 1,580,000

Office Supplies Expense 20,000

Utilities Expense 43,000

Initial Entry (Expense Method because of the account appeared in Trial Balance)

Office Supplies Expense 20,000

Cash 20,000
Ending Bal. (adjusted) Pag expense method, yung given na balance ang amount

Dec. 31 Office Supplies 2,300

Office Supplies Expense 2,300

Unearned/Deferred Revenue (Liability)

Liability Method – liability account was credited upon collection in advance

Income Method- revenue/income account was credited upon collection in advance.

Practice Problem

On August 1,2019, Esteban CPA Services received 480,000 for management consultancy services to be rendered for one
year.

Initial Entry (Liability method)

Aug. 1 Cash 480,000

Unearned Consultancy Revenue 480,000

Adjusting Entry yung gamit na na amount ang ilalagay sa adjusted bal

Dec. 31 Unearned Consultancy Revenue 200,000

Consultancy Revenue (480,000x5/12) 200,000

Unearned Consultancy Revenue Consultancy Revenue

Dec 31 200,000 480,000 Aug. 1 200,000 De. 31

280,000 Dec. 31 Adjusted Bal.

Initial Entry (Income method) yung di pa nagagamit ang ilalagay na amount

Aug. 1 Cash 480,000

Consultancy Revenue 480,000

Adjusting Entry yung di pa nagagamit ang ilalagay na amount sa adjusted bal.

Dec. 3 Consultancy Revenue 200,000

Unearned Consultancy Revenue (480,000x7/12) 200,000

Initial Entry ( Income method)

Dec 5 Cash 12,000

Transport fee revenue 12,000

Adjusting entry

Dec. 31

Transport fee revenue 12,000

Unearned transport revenue 12,000 (buo pa rin na utang dahil next year pa irerender)

Accrued Income/ receivable (Asset)

Revenue Recognition Principle- revenue or income is recognized as earned when rendered regardless if payment is
received or not

Receivable account- service is earned but not yet collected

Cleanwell Co. renders janitorial services to Audioman Enterprises for a monthly fee of 30,000. The fee for services
rendered during a month is collected by Cleanwell on the 3rd day of the following month.

Adjusting entry

Dec. 31 Accrued Janitorial Income 30,000

Janitorial Income 30,000

Calubad Medical Clinic received a 90-day, 12% 80,000 note from a client on Nov. 15,2019 ( pag may interest rate, it’s
adjusting entry is about recording the accrual of interest)

Adjusting Entry

Dec.31 Accrued Interest Receivable

Interest Income

I=Prt

=80,000 x 12% (interest rate is understood to be annual unless other stated)

= 9,600 interest per year

= 9600/360 days( 1 year) x 46 days (Nov. 16-Dec 31)

= 1,226.67 or 1227
Accrued Expense/Payable (liability account)

Liability for expense already incurred but not yet paid

Adjusting Entry: Expense xx

Payable xx

Practice Problem

Mortel Co pays its employees in semi-monthly basis. Salaries for the first half of the month are paid on the 20 th day of
same month while salaries for the second half are paid on the 5 th day of the ff month. Monthly salaries in 2019 amount
to 400,000.

Adjusting entry

Dec.31 Salaries Expense 200,000

Accrued Salaries Payable (400,000/2) 200,000

Mateo Realty purchase furnitures and fixtures amounting to 350,000 on October 9,2019 by issuing a 120-day 15%
promissory note

Adjusting Entry

Dec. 31 Accrued Interest Payable 12,104

Interest Expense ( 350,000x.15/360x83) 12,104