Welcome to our comprehensive guide on mastering adjusting entries in accounting! Adjusting entries are crucial for ensuring accurate financial reporting by aligning revenues and expenses with the period in which they are incurred.
In this post, we’ll explore 51 practical problems and solutions covering a range of adjusting entry scenarios. Whether you’re a beginner or looking to deepen your understanding, this guide will help you navigate the complexities of adjusting entries with confidence.
51 Essential Adjusting Entries Problems & Solutions
1. Prepaid Expenses:
Problem: XYZ Corp pays $1,200 for insurance coverage for the next year on December 1, 2023. Make the adjusting entry on December 31, 2023.
Solution:
- Adjusting Entry:
- Debit Insurance Expense: $100 ([$1,200 / 12 months] * 1 month)
- Credit Prepaid Insurance: $100
Explanation: Prepaid expenses represent costs that have been paid but have not yet been used or consumed. The adjusting entry recognizes the portion of the prepaid expense that has been used up during the accounting period, aligning expenses with the period they benefit, adhering to the matching principle.
2. Accrued Revenues:
Problem: ABC Consulting performed services worth $2,500 to a client in December 2023. The client will pay in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 2. Adjusting Entry:
- Debit Accounts Receivable: $2,500
- Credit Service Revenue: $2,500
Explanation: Accrued revenues are revenues that have been earned but not yet recorded. This adjusting entry recognizes the revenue earned in December even though the cash has not been received. It ensures that revenues are recognized when they are earned, adhering to the accrual basis of accounting.
3. Accrued Expenses:
Problem: XYZ Corp has incurred $800 of interest expense on a loan in December 2023, which will be paid in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 3. Adjusting Entry:
- Debit Interest Expense: $800
- Credit Interest Payable: $800
Explanation: Accrued expenses are expenses that have been incurred but not yet paid. This adjusting entry recognizes the expense in December when it was incurred, matching it with the period’s revenues. It follows the accrual basis of accounting by recording expenses when they are incurred, not when they are paid.
4. Depreciation Expense:
Problem: XYZ Corp purchased equipment for $10,000 with an estimated useful life of 5 years and no salvage value on January 1, 2023. Calculate and record the adjusting entry for depreciation on December 31, 2023, using the straight-line method.
Solution: 4. Adjusting Entry:
- Debit Depreciation Expense: $2,000 ($10,000 / 5 years)
- Credit Accumulated Depreciation: $2,000
Explanation: Depreciation expense reflects the systematic allocation of the cost of a tangible asset over its useful life. The adjusting entry for depreciation recognizes the portion of the asset’s cost that has been used up during the accounting period, matching it with the revenues generated by the asset’s use, in accordance with the matching principle.
5. Unearned Revenues:
Problem: ABC Media received $1,200 in advance from a client for services to be rendered evenly over the next six months, starting in December 2023. Record the adjusting entry on December 31, 2023.
Solution: 5. Adjusting Entry:
- Debit Unearned Revenue: $200 ($1,200 / 6 months)
- Credit Service Revenue: $200
Explanation: Unearned revenues represent cash received before services are provided. The adjusting entry recognizes the portion of the unearned revenue that has been earned during the accounting period, aligning revenues with the period they are earned, in accordance with the accrual basis of accounting.
6. Inventory Adjustment:
Problem: XYZ Corp’s ending inventory count reveals that $500 worth of inventory is damaged and unsalable. Record the adjusting entry on December 31, 2023.
Solution: 6. Adjusting Entry:
- Debit Cost of Goods Sold: $500
- Credit Inventory: $500
Explanation: Inventory adjustments are made to reflect the true value of inventory on hand. The adjusting entry recognizes the loss due to damaged or obsolete inventory, ensuring that the cost of goods sold is accurately reported, adhering to the matching principle.
7. Accrued Salaries Expense:
Problem: ABC Corp’s employees earn $5,000 in salaries for the last week of December 2023. The payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 7. Adjusting Entry:
- Debit Salary Expense: $5,000
- Credit Salary Payable: $5,000
Explanation: Accrued salaries represent the wages earned by employees but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and reflects the liability to pay employees for their services rendered, in accordance with the accrual basis of accounting.
8. Prepaid Rent:
Problem: XYZ Corp pays $1,800 for rent covering the months of January and February 2024 on December 31, 2023. Record the adjusting entry on December 31, 2023, for the portion of rent applicable to January.
Solution: 8. Adjusting Entry:
- Debit Rent Expense: $900 ($1,800 / 2 months)
- Credit Prepaid Rent: $900
Explanation: Prepaid rent represents rent paid in advance but not yet incurred. The adjusting entry recognizes the portion of the prepaid rent that has been used up during the accounting period, aligning expenses with the period they benefit, in accordance with the matching principle and accrual basis of accounting.
9. Bad Debt Provision:
Problem: ABC Corp estimates that 2% of its accounts receivable balance of $50,000 will be uncollectible. Make the adjusting entry for bad debts on December 31, 2023.
Solution: 9. Adjusting Entry:
- Debit Bad Debt Expense: $1,000 ($50,000 * 2%)
- Credit Allowance for Doubtful Accounts: $1,000
Explanation: The bad debt provision represents the portion of accounts receivable that is expected to be uncollectible. The adjusting entry recognizes the estimated bad debt expense for the period, matching it with the revenues recognized, and establishes an allowance to account for potential losses, adhering to the matching principle and conservatism principle.
10. Deferred Revenue:
Problem: XYZ Corp receives $3,000 from a customer for services to be performed evenly over the next six months, starting in December 2023. Record the adjusting entry on December 31, 2023.
Solution: 10. Adjusting Entry:
- Debit Deferred Revenue: $500 ($3,000 / 6 months)
- Credit Service Revenue: $500
Explanation: Deferred revenue (or unearned revenue) represents cash received for services not yet performed. The adjusting entry recognizes the portion of the deferred revenue that has been earned during the accounting period, aligning revenue recognition with the period in which services are provided, adhering to the accrual basis of accounting.
11. Accrued Interest Income:
Problem: ABC Bank earns $400 of interest income on loans in December 2023, which will be received in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 11. Adjusting Entry:
- Debit Interest Receivable: $400
- Credit Interest Income: $400
Explanation: Accrued interest income represents interest earned but not yet received. The adjusting entry recognizes the interest income in December when it was earned, aligning revenue recognition with the period it is earned, in accordance with the accrual basis of accounting.
12. Allowance for Depreciation Adjustment:
Problem: XYZ Corp revises its estimate for depreciation on equipment, increasing it from $2,000 to $2,500 for the year ended December 31, 2023. Make the adjusting entry.
Solution: 12. Adjusting Entry:
- Debit Depreciation Expense: $500 ($2,500 – $2,000)
- Credit Accumulated Depreciation: $500
Explanation: Adjustments to the allowance for depreciation are made when there are changes in estimates or asset impairment. The adjusting entry reflects the revised estimate for depreciation expense, ensuring that it accurately reflects the asset’s consumption over its useful life, in accordance with the matching principle.
13. Accrued Utilities Expense:
Problem: ABC Company uses utilities for December 2023, but the bill will not arrive until January 2024. The estimated utility expense for December is $800. Record the adjusting entry on December 31, 2023.
Solution: 13. Adjusting Entry:
- Debit Utilities Expense: $800
- Credit Utilities Payable: $800
Explanation: Accrued utilities expense represents the cost of utilities consumed but not yet paid for. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues and reflecting the obligation to pay for the utilities used, adhering to the accrual basis of accounting.
14. Inventory Obsolescence Provision:
Problem: XYZ Corp’s inventory includes items that are no longer selling well and are expected to be sold at a loss. The estimated provision for inventory obsolescence is $1,200. Make the adjusting entry on December 31, 2023.
Solution: 14. Adjusting Entry:
- Debit Cost of Goods Sold: $1,200
- Credit Inventory Allowance for Obsolescence: $1,200
Explanation: Inventory obsolescence provision recognizes the expected loss due to inventory that is no longer marketable or has decreased in value. The adjusting entry reflects the estimated provision for inventory obsolescence, ensuring that the inventory is reported at its net realizable value, adhering to the conservatism principle.
15. Prepaid Advertising Expense:
Problem: ABC Corp prepaid $2,400 for advertising services for the next six months starting from November 2023. Record the adjusting entry on December 31, 2023, for the portion applicable to December.
Solution: 15. Adjusting Entry:
- Debit Advertising Expense: $400 ($2,400 / 6 months)
- Credit Prepaid Advertising: $400
Explanation: Prepaid advertising expense represents the cost of advertising paid in advance but not yet incurred. The adjusting entry recognizes the portion of the prepaid advertising expense that has been used up during the accounting period, aligning expenses with the period they benefit, in accordance with the matching principle.
16. Accrued Warranty Expense:
Problem: XYZ Corporation sold products in December 2023 that are covered by a one-year warranty. The estimated warranty expense for December’s sales is $600. Record the adjusting entry on December 31, 2023.
Solution: 16. Adjusting Entry:
- Debit Warranty Expense: $600
- Credit Warranty Liability: $600
Explanation: Accrued warranty expense represents the estimated cost of honoring warranties for products sold. The adjusting entry recognizes the expense in December when the products were sold, aligning with the period’s revenues, and establishes a liability to fulfill future warranty claims, adhering to the matching principle and accrual basis of accounting.
17. Deferred Tax Asset:
Problem: ABC Corporation has $5,000 in deductible temporary differences that will result in future tax savings. Calculate and record the adjusting entry for the deferred tax asset assuming a tax rate of 20%.
Solution: 17. Adjusting Entry:
- Debit Deferred Tax Asset: $1,000 ($5,000 * 20%)
- Credit Income Tax Expense: $1,000
Explanation: Deferred tax assets represent future tax benefits that arise from temporary differences between taxable income and accounting income. The adjusting entry recognizes the deferred tax asset, reflecting the expected tax savings in future periods, and adjusts income tax expense accordingly, adhering to the principles of conservatism and the matching principle.
18. Accrued Commission Expense:
Problem: ABC Sales Agency’s employees earn commissions of $2,000 for sales made in December 2023. The commissions will be paid in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 18. Adjusting Entry:
- Debit Commission Expense: $2,000
- Credit Commission Payable: $2,000
Explanation: Accrued commission expense represents commissions earned by employees but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and establishes a liability for the amount owed to employees, adhering to the accrual basis of accounting.
19. Prepaid Interest Expense:
Problem: XYZ Corp paid $3,600 in interest for a loan that covers the next 12 months, starting in December 2023. Record the adjusting entry on December 31, 2023, for the portion of interest expense applicable to December.
Solution: 19. Adjusting Entry:
- Debit Interest Expense: $300 ($3,600 / 12 months)
- Credit Prepaid Interest: $300
Explanation: Prepaid interest expense represents interest paid in advance but not yet incurred. The adjusting entry recognizes the portion of the prepaid interest expense that corresponds to December’s interest obligation, aligning expenses with the period they benefit, in accordance with the matching principle and accrual basis of accounting.
20. Amortization of Intangible Assets:
Problem: ABC Corporation acquired a patent for $10,000 with a useful life of 5 years. Record the adjusting entry for amortization expense on December 31, 2023, using the straight-line method.
Solution: 20. Adjusting Entry:
- Debit Amortization Expense: $2,000 ($10,000 / 5 years)
- Credit Accumulated Amortization: $2,000
Explanation: Amortization of intangible assets reflects the systematic allocation of the cost of intangible assets over their useful lives. The adjusting entry recognizes the portion of the patent’s cost that has been used up during the accounting period, aligning expenses with the period they benefit, in accordance with the matching principle.
21. Accrued Property Taxes:
Problem: XYZ Corp’s annual property tax bill is $6,000, payable in March. Record the adjusting entry on December 31, 2023, for the portion of property taxes applicable to the current year.
Solution: 21. Adjusting Entry:
- Debit Property Tax Expense: $2,000 ($6,000 / 3 months)
- Credit Property Taxes Payable: $2,000
Explanation: Accrued property taxes represent property taxes incurred but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
22. Accrued Rent Expense:
Problem: ABC Company rents office space for $2,000 per month. The rent for December 2023 will be paid on January 5, 2024. Record the adjusting entry on December 31, 2023.
Solution: 22. Adjusting Entry:
- Debit Rent Expense: $2,000
- Credit Rent Payable: $2,000
Explanation: Accrued rent expense represents rent owed but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and establishes a liability for the rent owed, adhering to the accrual basis of accounting.
23. Accrued Interest Payable:
Problem: XYZ Corporation borrowed $50,000 on December 1, 2023, at an annual interest rate of 8%. Record the adjusting entry for accrued interest expense on December 31, 2023.
Solution: 23. Adjusting Entry:
- Debit Interest Expense: $333.33 ($50,000 * 8% * 1/12)
- Credit Interest Payable: $333.33
Explanation: Accrued interest payable represents interest owed but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and establishes a liability for the interest owed, adhering to the accrual basis of accounting.
24. Accrued Bonus Expense:
Problem: ABC Corporation promises its employees a year-end bonus equal to 5% of net income. The net income for the year ending December 31, 2023, is $100,000. Record the adjusting entry for the accrued bonus on December 31, 2023.
Solution: 24. Adjusting Entry:
- Debit Bonus Expense: $5,000 ($100,000 * 5%)
- Credit Bonus Payable: $5,000
Explanation: Accrued bonus expense represents bonuses owed but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s revenues, and establishes a liability for the bonuses owed, adhering to the accrual basis of accounting.
25. Accrued Utilities Revenue:
Problem: XYZ Electric Company provides electricity services to customers for December 2023, with billings to be issued in January 2024. The estimated revenue for December’s services is $4,500. Record the adjusting entry on December 31, 2023.
Solution: 25. Adjusting Entry:
- Debit Accounts Receivable: $4,500
- Credit Utilities Revenue: $4,500
Explanation: Accrued utilities revenue represents revenue earned but not yet billed to customers. The adjusting entry recognizes the revenue in December when the services were provided, aligning with the period’s activities, and establishes a receivable for the amount to be collected, adhering to the accrual basis of accounting.
26. Amortization of Bond Premium:
Problem: ABC Corporation issued bonds with a face value of $100,000 at a premium. The bond premium amortization for the year ended December 31, 2023, is $1,200. Record the adjusting entry for bond premium amortization.
Solution: 26. Adjusting Entry:
- Debit Bond Interest Expense: $1,200
- Credit Premium on Bonds Payable: $1,200
Explanation: Amortization of bond premium represents the gradual reduction of the premium paid over the life of the bond. The adjusting entry recognizes the portion of the bond premium amortized during the accounting period, aligning interest expense with the period’s activities and reflecting the reduction in the premium liability.
27. Accrued Royalty Expense:
Problem: XYZ Music Company owes royalties to artists for music sales in December 2023. The estimated royalty expense for December’s sales is $3,000. Record the adjusting entry on December 31, 2023.
Solution: 27. Adjusting Entry:
- Debit Royalty Expense: $3,000
- Credit Royalty Payable: $3,000
Explanation: Accrued royalty expense represents royalties owed to artists but not yet paid. The adjusting entry recognizes the expense in December when the sales occurred, aligning with the period’s revenues, and establishes a liability for the royalties owed, adhering to the accrual basis of accounting.
28. Accrued Legal Expenses:
Problem: ABC Law Firm incurred $5,000 in legal expenses during December 2023. The payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 28. Adjusting Entry:
- Debit Legal Expense: $5,000
- Credit Accounts Payable: $5,000
Explanation: Accrued legal expenses represent legal services rendered but not yet paid for. The adjusting entry recognizes the expense in December when the services were provided, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
29. Amortization of Deferred Revenue:
Problem: XYZ Corporation received $12,000 for services to be provided over 12 months, starting in January 2023. Calculate and record the adjusting entry for the portion of revenue earned in December 2023.
Solution: 29. Adjusting Entry:
- Debit Deferred Revenue: $1,000 ($12,000 / 12 months)
- Credit Service Revenue: $1,000
Explanation: Amortization of deferred revenue represents revenue recognized over time as services are provided. The adjusting entry recognizes the portion of revenue earned in December, aligning with the period’s activities, and reduces the deferred revenue liability, adhering to the matching principle and accrual basis of accounting.
30. Accrued Property Maintenance Expense:
Problem: ABC Property Management incurred $2,500 in property maintenance expenses during December 2023. Payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 30. Adjusting Entry:
- Debit Property Maintenance Expense: $2,500
- Credit Accounts Payable: $2,500
Explanation: Accrued property maintenance expenses represent expenses incurred but not yet paid. The adjusting entry recognizes the expense in December when the maintenance was performed, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
31. Accrued Advertising Expenses:
Problem: XYZ Corporation incurred $3,000 in advertising expenses during December 2023. Payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 31. Adjusting Entry:
- Debit Advertising Expense: $3,000
- Credit Accounts Payable: $3,000
Explanation: Accrued advertising expenses represent expenses incurred but not yet paid. The adjusting entry recognizes the expense in December when the advertising was done, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
32. Amortization of Organization Costs:
Problem: ABC Corporation incurred $10,000 in organization costs when incorporating. The organization costs have a useful life of 5 years. Record the adjusting entry for amortization expense on December 31, 2023.
Solution: 32. Adjusting Entry:
- Debit Amortization Expense: $2,000 ($10,000 / 5 years)
- Credit Accumulated Amortization: $2,000
Explanation: Amortization of organization costs represents the gradual reduction of the costs associated with incorporating the business over its useful life. The adjusting entry recognizes the portion of the organization costs amortized during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
33. Accrued Professional Fees:
Problem: XYZ Consulting engaged external consultants for project assistance in December 2023, incurring $6,000 in professional fees. Payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 33. Adjusting Entry:
- Debit Professional Fees Expense: $6,000
- Credit Accounts Payable: $6,000
Explanation: Accrued professional fees represent fees for services rendered but not yet paid. The adjusting entry recognizes the expense in December when the services were provided, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
34. Accrued Employee Benefits:
Problem: ABC Corporation offers year-end bonuses to employees, totaling $20,000. The bonuses will be paid in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 34. Adjusting Entry:
- Debit Bonus Expense: $20,000
- Credit Bonus Payable: $20,000
Explanation: Accrued employee benefits represent benefits earned by employees but not yet paid. The adjusting entry recognizes the expense in December when the bonuses were earned, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
35. Amortization of Leasehold Improvements:
Problem: XYZ Corporation invested $50,000 in leasehold improvements with a useful life of 10 years. Record the adjusting entry for amortization expense on December 31, 2023.
Solution: 35. Adjusting Entry:
- Debit Amortization Expense: $5,000 ($50,000 / 10 years)
- Credit Accumulated Amortization: $5,000
Explanation: Amortization of leasehold improvements represents the gradual reduction of the costs associated with improvements made to leased property over its useful life. The adjusting entry recognizes the portion of the leasehold improvements amortized during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
36. Accrued Interest Income:
Problem: ABC Bank earned $2,000 in interest income from investments in December 2023. The interest will be received in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 36. Adjusting Entry:
- Debit Interest Receivable: $2,000
- Credit Interest Income: $2,000
Explanation: Accrued interest income represents interest earned but not yet received. The adjusting entry recognizes the income in December when it was earned, aligning with the period’s activities, and establishes a receivable for the amount to be collected, adhering to the accrual basis of accounting.
37. Accrued Interest Expense:
Problem: XYZ Corporation borrowed $100,000 at an annual interest rate of 6%. The interest is payable semi-annually, and the interest expense for the period ending December 31, 2023, is due. Record the adjusting entry for accrued interest expense.
Solution: 37. Adjusting Entry:
- Debit Interest Expense: $3,000 (($100,000 * 6%) / 2)
- Credit Interest Payable: $3,000
Explanation: Accrued interest expense represents interest owed but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s activities, and establishes a liability for the interest owed, adhering to the accrual basis of accounting.
38. Amortization of Deferred Financing Costs:
Problem: ABC Corporation incurred $20,000 in financing costs related to a long-term loan. The costs are to be amortized over the life of the loan, which is five years. Record the adjusting entry for amortization expense on December 31, 2023.
Solution: 38. Adjusting Entry:
- Debit Amortization Expense: $4,000 ($20,000 / 5 years)
- Credit Accumulated Amortization – Financing Costs: $4,000
Explanation: Amortization of deferred financing costs represents the gradual reduction of the costs associated with obtaining financing over its useful life. The adjusting entry recognizes the portion of the financing costs amortized during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
39. Accrued Vacation Pay:
Problem: XYZ Company has a policy to accrue vacation pay for its employees at the rate of 1 day for every month worked. The total accrued vacation pay for December 2023 is $1,000. Record the adjusting entry for accrued vacation pay.
Solution: 39. Adjusting Entry:
- Debit Vacation Expense: $1,000
- Credit Accrued Vacation Payable: $1,000
Explanation: Accrued vacation pay represents the amount owed to employees for accrued but unused vacation time. The adjusting entry recognizes the expense in December when the vacation time was earned, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
40. Accrued Property Management Fees:
Problem: ABC Property Management Company provides property management services and earns fees of $2,500 per month. Services for December 2023 have been provided but not yet billed. Record the adjusting entry on December 31, 2023.
Solution: 40. Adjusting Entry:
- Debit Accounts Receivable: $2,500
- Credit Property Management Revenue: $2,500
Explanation: Accrued property management fees represent revenue earned but not yet billed. The adjusting entry recognizes the revenue in December when the services were provided, aligning with the period’s activities, and establishes a receivable for the amount to be collected, adhering to the accrual basis of accounting.
41. Amortization of Trademarks:
Problem: XYZ Corporation acquired trademarks for $50,000 with an estimated useful life of 10 years. Record the adjusting entry for amortization expense on December 31, 2023.
Solution: 41. Adjusting Entry:
- Debit Amortization Expense: $5,000 ($50,000 / 10 years)
- Credit Accumulated Amortization – Trademarks: $5,000
Explanation: Amortization of trademarks represents the systematic allocation of the cost of trademarks over their useful life. The adjusting entry recognizes the portion of the trademark cost that has been used up during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
42. Accrued Professional Services:
Problem: ABC Consulting engaged external consultants for a project in December 2023, incurring $6,000 in professional services. Payment will be made in January 2024. Record the adjusting entry on December 31, 2023.
Solution: 42. Adjusting Entry:
- Debit Professional Services Expense: $6,000
- Credit Accounts Payable: $6,000
Explanation: Accrued professional services represent services received but not yet paid. The adjusting entry recognizes the expense in December when the services were received, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
43. Accrued Interest Revenue:
Problem: XYZ Corporation invested $50,000 in bonds earning 8% annual interest. The interest is payable semi-annually, and the interest revenue for the period ending December 31, 2023, is due. Record the adjusting entry for accrued interest revenue.
Solution: 43. Adjusting Entry:
- Debit Interest Receivable: $2,000 (($50,000 * 8% * 6/12))
- Credit Interest Revenue: $2,000
Explanation: Accrued interest revenue represents interest earned but not yet received. The adjusting entry recognizes the revenue in December when it was earned, aligning with the period’s activities, and establishes a receivable for the amount to be collected, adhering to the accrual basis of accounting.
44. Amortization of Goodwill:
Problem: ABC Corporation acquired another company and recorded goodwill of $100,000. The goodwill has an indefinite useful life. Record the adjusting entry for amortization of goodwill on December 31, 2023.
Solution: 44. Adjusting Entry:
- No Entry Required
Explanation: Goodwill with an indefinite useful life is not amortized but tested for impairment annually or more frequently if there are indicators of impairment. Therefore, no adjusting entry is made for the amortization of goodwill.
45. Accrued Property Taxes Expense:
Problem: XYZ Corporation’s annual property tax expense is $12,000. Record the adjusting entry on December 31, 2023, for the portion of property taxes applicable to the current year.
Solution: 45. Adjusting Entry:
- Debit Property Tax Expense: $12,000
- Credit Property Taxes Payable: $12,000
Explanation: Accrued property tax expense represents property taxes incurred but not yet paid. The adjusting entry recognizes the expense in December when it was incurred, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
46. Accrued Salaries Expense:
Problem: ABC Corporation has a bi-weekly payroll cycle, with the last payday falling on December 29, 2023. Employees worked two additional days until December 31, 2023, which will be paid in January 2024. The total additional salary expense for those two days is $5,000. Record the adjusting entry on December 31, 2023.
Solution: 46. Adjusting Entry:
- Debit Salaries Expense: $5,000
- Credit Salaries Payable: $5,000
Explanation: Accrued salaries expense represents wages earned by employees but not yet paid. The adjusting entry recognizes the expense in December when the services were performed, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
47. Amortization of Software Development Costs:
Problem: XYZ Tech Company incurred $50,000 in costs to develop proprietary software. The software has a useful life of 5 years. Record the adjusting entry for amortization expense on December 31, 2023.
Solution: 47. Adjusting Entry:
- Debit Amortization Expense: $10,000 ($50,000 / 5 years)
- Credit Accumulated Amortization – Software: $10,000
Explanation: Amortization of software development costs represents the gradual reduction of the costs associated with developing software over its useful life. The adjusting entry recognizes the portion of the software development costs amortized during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
48. Accrued Warranty Revenue:
Problem: ABC Electronics sells electronic devices with a one-year warranty. Based on historical data, ABC estimates that warranty claims will amount to $2,000 for December 2023 sales. Record the adjusting entry on December 31, 2023.
Solution: 48. Adjusting Entry:
- Debit Warranty Expense: $2,000
- Credit Warranty Liability: $2,000
Explanation: Accrued warranty revenue represents revenue recognized for warranties associated with products sold but not yet honored. The adjusting entry recognizes the estimated warranty expense in December when the products were sold, aligning with the period’s activities, and establishes a liability for future warranty claims, adhering to the matching principle.
49. Accrued Interest Receivable:
Problem: XYZ Corporation holds a $100,000 investment in bonds that pay 6% interest annually. The interest is accrued monthly. Record the adjusting entry for accrued interest receivable on December 31, 2023.
Solution: 49. Adjusting Entry:
- Debit Interest Receivable: $500 ($100,000 * 6% / 12 months)
- Credit Interest Income: $500
Explanation: Accrued interest receivable represents interest earned but not yet received. The adjusting entry recognizes the interest income in December when it was earned, aligning with the period’s activities, and establishes a receivable for the amount to be collected, adhering to the accrual basis of accounting.
50. Amortization of Patents:
Problem: ABC Corporation purchased a patent for $50,000 with a useful life of 10 years. Record the adjusting entry for amortization expense on December 31, 2023, using the straight-line method.
Solution: 50. Adjusting Entry:
- Debit Amortization Expense: $5,000 ($50,000 / 10 years)
- Credit Accumulated Amortization – Patents: $5,000
Explanation: Amortization of patents represents the systematic allocation of the cost of patents over their useful life. The adjusting entry recognizes the portion of the patent cost that has been used up during the accounting period, aligning with the period’s activities, and reduces the asset value, adhering to the matching principle.
51. Accrued Commission Expense:
Problem: XYZ Sales Agency owes its sales representatives $8,000 in commissions for sales made in December 2023. Record the adjusting entry on December 31, 2023.
Solution: 51. Adjusting Entry:
- Debit Commission Expense: $8,000
- Credit Commission Payable: $8,000
Explanation: Accrued commission expense represents commissions owed to employees but not yet paid. The adjusting entry recognizes the expense in December when the sales were made, aligning with the period’s activities, and establishes a liability for the amount owed, adhering to the accrual basis of accounting.
Congratulations on completing our in-depth exploration of adjusting entries! We’ve covered a wide array of scenarios, from accrued expenses to amortization, providing you with a solid foundation in accounting principles.
Remember, mastering adjusting entries takes practice, but with the knowledge gained from this guide, you’re well-equipped to navigate the intricacies of financial reporting with accuracy and confidence.
Keep applying these concepts, and you’ll excel in your accounting endeavors.
