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PROBLEMS

the 'income method of initial recording of advanced collections of items of income.

PROBLEM 1: TRUE OR FALSE 1. Adjusting entries are usually recorded at the beginning of

each reporting period. 2. Adjusting entries are optional. An entity can prepare financial

statements without preparing first the adjusting entries. 3. All adjusting entries involve at least one balance sheet account

and one income statement account (or statement of

comprehensive income account). 4. All adjusting entries affect the profit or loss for the period (on

comprehensive income for the period). 5. In accounting, the phrase "to accrue" means to postpone the

recognition of an income or expense.

PROBLEM 2: FOR CLASSROOM DISCUSSION Accruals, depreciation and bad debts We the following information for the next four questions: Entity A is preparing its December 31, 20x1 financial statements. Provide the year-end adjusting entries for the following:

DIDO

1 Entity A entered into a 1-year contract for a billboard

advertising on August 1, 20x1. The monthly rent for the billboard is P200,000, payable at the start of each month. Entity A has paid the rentals for the months of August to November 20x1.

Use the following information for the next two questions: Your business is renting a commercial space. The monthly rent P100. At the start of Month 1, you paid three-month advanced rent of P300. 6. If you prepare financial statements at the end of Month 1, your

balance sheet will show a "Prepaid rent" of P100. 7. If you prepare financial statements the end of Montn 1, you!

income statement will show a "Rent expense" of P100.

Entity A received a 10%, P180,000, one-year, note receivable from a customer on October 31, 20x1. Both the principal and interest on the note are due on November 1, 20x2.

Entity A acquired a machine on November 30, 20x1 for P420,000. The machine has an estimated useful life of 8 years.

Entity A has total accounts receivable of P890,000 as of December 31, 20x1. Of that amount, P45,000 were estimated to he doubtful of collection.

8. The y -end adjusting entry for prepayments or advance

collections is the opposite of the method used on initial recording. For example, if you have used the income method on initial recording, your year-end adjusting entry would

to recognize a liability (i.e., the unearned portion). 9. One of the adjusting entries that Entity A has made at your

end involved a debit to a prepaid asset account and a credit an expense account. Entity A must have used the at

method' of initial recording of prepayments of expenses. 10. One of the adjusting entries that Entity B has made at yearen

involved a debit to an income account and a credit to liability (unearned income) account. Entity A must have

aplitting of mixed accounts On May 1, 20x1, Entity B received one-year advanced rent of

480,000 from one of its tenants. The advanced rent covers the months of May 1, 20x1 to April 30, 20x2.

Requirements:

Provide the journal entry to record the collection on May 1, 20x1 under each of the following methods:

i. Liability method