Problem #1: Accrual of Royalties

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

Problem #2: Accrual of Interest Expense

Florenda Quino Forwarders borrowed P600,000 from the bank on Sept 1, 2011. The note carried an 8% annual rate of interest and was
set to mature on Feb 28, 2012. Interest and principal were paid in cash on the maturity date.
Required:
1. What was the amount of interest expense paid in cash in 2011?
2. What was the amount of interest expense recognized on the 2011 income statement?
3. What was the amount of total liabilities shown on the 2011 balance sheet?
4. What was the total amount of cash that was paid to the bank on Feb 28, 2012 for principal and interest?
5. What was the amount of interest expense shown on the 2012 income statement?

Problem #3: Accrual of Interest Revenue

Reynaldo San Mateo, an investor, decided to invest P1,200,000 excess cash in a certificate of deposit on April 1, 2010. The certificate
carried an 8% annual rate of interest and a 1-year term to maturity. Interest will be withdrawn monthly (disregard tax effects).
Required:
1. What amount of income will be recognized for the year ending Dec 31, 2010?
2. What amount of cash will be collected for interest revenue in 2010?
3. What is the amount of interest receivable as of Dec 31, 2010?
4. What amount of cash will be collected for interest revenue in 2011?
5. What amount of interest revenue will be recognized in 2011?
6. What is the amount of interest receivable as of Dec 31, 2011?

Problem #4: Adjusting Entries and Accounting Policy

The following are some of the transactions made by TImoleon Lianza Cleaners during 2011
Apr. 1 Acquired cleaning supplies in the amount of P260,000. A count of the supplies on Dec 31, 2011 amounted to P110,000.
Aug. 1 Received P360,000 from Cebu Company for cleaning janitorial uniforms over the next 3 years.
Nov. 1 Paid P240,000 for annual rent.
Required:
1. Assume that Lianza records these transactions using the following accounts, record the adjusting entries on Dec 31, 2011: (1) Office
Supplies, (2) Prepaid Rent, (3) Unearned Cleaning Revenues
2. Now, assume that Lianza records these transactions using the following accounts, what will be the adjusting entries on Dec 31,
2011? (1) Office Supplies Expense, (2) Rent Expense, (3) Cleaning Revenues
3. If Lianza were to use reversing entries, which set of entries, (1) or (2), would have to be reversed? Why?

Problem #5: Preparing Adjusting Entries

Prepare the adjusting entry for each of the following for the year ending Dec 31, 2011:
a. The payment of the P19,000 insurance premium for two years in advance was originally recorded as Prepaid Insurance. One year of
the policy has now expired.
b. All employees earn a total of P10,000 per day for a five-day week beginning on Monday and ending Friday. They were paid for the
workweek ending Dec 24.
c. The Supplies account had a balance of P4,480 on Jan 1. During the year, P11,000 of supplies were bought. A year-end inventory
showed that P6,400 worth of supplies are still on hand.
d. Equipment costing P588,000 has a useful life of five years with an P80,000 salvage value at the end of five years. Record the
depreciation for the year.

Problem #6: Preparing Adjusting Entries at Year-End

The Gloria Dimen Company presented the following information pertaining to accounts that will need adjustments for its Nov 30, 2011
year-end financial adjustments:
a. On Oct 1, 2011, Gloria Dimen Company paid P10,800 for 6-months’ insurance premiums
b. The balance in the ledger account Office Supplies amounted to P32,000. A count of the office supplies on Nov 30, 2011 totaled
P12,800
c. Gloria Dimen Company received P22,800 on Nov 1, 2011 from a customer for services to be rendered during the months of
November, December, January, and February
d. Gloria Dimen acquired Office Equipment costing P352,800 on Apr 1, 2011. The equipment is expected to last 5 years after which it
will be worthless
e. Assume that Nov 30, 2011 is a Friday and that Gloria Dimen pays its employees a total of P87,500 on Saturday

Required:
1. Prepare the adjusting entries
2. Prepare the Dec 1, 2011 entry to record the payment of the salaries
Reviewer for Adjusting Entries Prepared by Aldrin C. Castro

Problem #7: Analyzing Accounts

The income statement for Narciso Gabayan Company included the following expenses for 2011
Rent Expense P 780,000
Interest Expense 117,000
Salaries Expense 1,245,000
Listed below are the related balance sheet account balances at year end for last year and this year.
2010 2011
Prepaid Rent ------------ P 13,500
Interest Payable P 18,000 ------------
Salaries Payable 75,000 114,000
Required:
1. Compute the cash paid for rent during 2011
2. Compute the cash paid for interest during 2011
3. Compute the cash paid for salaries during 2011

Problem #8
Reynante Rivera Company bought equipment on January 3 of this year for P100,000. At the time of purchase, the equipment was
estimated to have a useful life on nine years and a trade-in value of P10,000 at the end of nine years. Using the straight-line method,
the amount of one year’s depreciation is
A) 11,110 B) 12,220 C) 90,000 D) 10,000 E) 20,000
Problem #9
If equipment cost P200,000 and accumulated depreciation amounts to P60,000, the book value of the equipment is
A) 260,000 B) 60,000 C) 140,000 D) 200,000
Problem #10
A law firm began November with office supplies of P16,000. During the month, the firm purchased supplies of P29,000. On November
30, supplies on hand totaled P21,000. Supplies expense for the period is
A) 21,000 B) 24,000 C) 29,000 D) 45,000
Problem #11
A company has P1,500 of supplies on hand at the end of 2010. During 2011, P2,750 of supplies were purchased. A count of supplies on
hand at the end of 2011 found an inventory of P875. What was the amount of supplies expense for 2011?
A) 1,875 B) 5,125 C) 3,375 D) 4,250
Problem #12
At the beginning of 2010, a company purchased a fire insurance policy covering a property for a period of two years. The P5,600 cost of
the policy was paid in cash. At the end of 2010, the company will reduce Prepaid Insurance for this policy by:
A) 0 B) 467 C) 5,600 D) 2,800
Problem #13
A company that pays employees every two weeks has paid workers P375,000 in wages and salaries for work completed during 2010. In
addition, the employees earned one week’s salary of P7,200 at the end of December that will be paid as part of the P14,400 payroll at
the end of the first week of January in 2011. How much should the company report for salaries and wages expense for 2010?
A) 367,800 B) 375,000 C) 389,400 D) 382,200
Use the following information to answer questions 14-18 below. The trial balance for Christine Resultay Company appears as follows:
Christine Resultay Company
Trial Balance
December 31, 2011
Cash 20,000
Accounts Receivable 50,000
Prepaid Insurance 5,000
Supplies 15,000
Office Equipment 40,000
Accu. Depn. – Office Eqpt. 20,000
Accounts Payable 30,000
Resultay, Capital 60,000
Service Revenues 50,000
Salaries Expense 10,000
Rent Expense 20,000 .
TOTAL P 160,000 P 160,000
___ 14) If on Dec 31, 2011, supplies on hand were P2,000, the adjusting entry would contain a
A) Debit to Supplies for P2,000
B) Credit to Supplies for P2,000
C) Debit to Supplies Expense for P13,000
D) Credit to Supplies Expense for P13,000

___ 15) If on Dec 31, 2011, the insurance still unexpired amounted to P2,000, the adjusting entry would contain a
A) Debit to Prepaid Insurance for P3,000
B) Credit to Prepaid Insurance for P3,000
C) Debit to Insurance Expense for P2,000
D) Credit to Prepaid Insurance for P2,000

___ 16) If the estimated depreciation for office equipment were P20,000, the adjusting entry would contain a
A) Credit to Acc. Depn. – Office Eqpt. for P20,000
B) Credit to Depn. Expn. – Office Eqpt. for P20,000
C) Debit to Acc. Depn. – Office Eqpt. for P20,000
D) Credit to Office Equipment for P20,000

___ 17) If as of Dec 31, 2011 the rent of P10,000 for December had not been recorded or paid, the adjusting entry would include a
A) Credit to Accumulated Rent for P10,000
B) Debit to Rent Payable for P10,000
C) Debit to Rent Expense for P10,000
D) Credit to Cash for P10,000

___ 18) If services totaling P12,500 had been performed but not yet billed, the adjusting entry to record this would include a
A) Debit to Service Revenues for P12,500
B) Credit to Unearned Service Revenues for P12,500
C) Credit to Service Revenues for P62,500
D) Credit to Service Revenues for P12,500