Chapter 9

Accounting Cycle of a Service Business

NAME: Date:
Professor: Section: Score:

QUIZ 1: TRUE OR FALSE

1. A worksheet is prepared primarily to facilitate the preparation of the financial

statements.

2. In the income statement columns of the worksheet, if total debits exceed total
credits, there is profit.

3. Closing entries are prepared at the end of the accounting period to “zero out” the
balances of all nominal accounts in the ledger.

4. The amounts in the “post-closing trial balance” represent the beginning balances
of accounts in the next accounting period.

5. All adjusting entries can be reversed.

6. The trial balance is the end product of the accounting process.

7. Accounts receivable is an example of a real account.

8. Worksheets are prepared only in the classroom. They are not prepared in real
life.

9. The financial statements are prepared only after adjusting entries are made.

10. The unexpired portion of an item of expense that was paid in advanced is
recognized as expense.

“Education is not just about going to school and getting a degree. It's about
widening your knowledge and absorbing the truth about life.” - Shakuntala Devi
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KEY ANSWERS TO QUIZ 1:
1. TRUE
2. FALSE
3. TRUE
4. TRUE
5. FALSE
6. FALSE (financial statements)
7. TRUE
8. FALSE
9. TRUE
10. FALSE

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NAME: Date:
Professor: Section: Score:

QUIZ 2: WORKSHEET AND FINANCIAL STATEMENTS

Entity A started operations on January 1, 20x1. A summary of the transactions during the year is
provided below:

1. The owner invested ₱2,000,000 to the business.

2. Acquired equipment for ₱1,000,000 cash.
3. Obtained a 12%, one-year, bank loan of ₱500,000.
4. Paid one-year insurance amounting to ₱160,000 on September 30, 20x1. Entity A uses the “asset
method” in recording prepayments.
5. Total service fees earned amounted to ₱6,000,000, one-third of which was on cash basis.
6. Collected ₱1,800,000 accounts receivable.
7. Total salaries expense paid amounted to ₱1,200,000.
8. Total utilities expense paid amounted ₱500,000.
9. Total supplies purchased on cash basis amounted to ₱120,000.
10. Total owner’s drawings amounted to ₱1,400,000.

Requirements:
a. Provide the journal entries for the transactions.
b. Post the entries to the ledger using T-accounts.
c. Prepare the unadjusted trial balance using a worksheet.
d. Prepare the adjusting entries (see additional information below).

Information for adjusting entries:

i. The equipment was acquired on January 1, 20x1 and was estimated to have a useful life of 10
years.
ii. The loan was obtained on July 1, 20x1. Principal and interest are due at maturity date.
iii. The one-year insurance covers the period October 1, 20x1 to September 30, 20x2.
iv. Unused supplies at the end of the year amounted to ₱40,000.

e. Complete the worksheet.

f. Prepare the closing entries.
g. Prepare the balance sheet and income statement.

“Again, I tell you that if two of you on earth agree about anything you ask for, it will be done for you by my
Father in heaven. For where two or three come together in my name, there am I with them.” (Matthew 18:19-20)

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SOLUTIONS TO QUIZ 2:

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Requirement (a):

1 Cash 2,000,000
Owner’s, Capital 2,000,000
to record the owner’s investment to the business
2 Equipment 1,000,000
Cash 1,000,000
to record the acquisition of equipment for cash
3 Cash 500,000
Notes payable 500,000
to record the bank loan
4 Prepaid insurance 160,000
Cash 160,000
to record the prepayment of insurance
5 Cash (6M x 1/3) 2,000,000
Accounts receivable (6M x 2/3) 4,000,000
Service fees 6,000,000
to record service fees
6 Cash 1,800,000
Accounts receivable 1,800,000
to record collection of accounts receivable
7 Salaries expense 1,200,000
Cash 1,200,000
to record salaries expense
8 Utilities expense 500,000
Cash 500,000
to record utilities expense
9 Prepaid supplies 120,000
Cash 120,000
to record purchase of supplies
10 Owner’s drawings 1,400,000
Cash 1,400,000
to record owner’s drawings

Requirement (b): Posting

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ASSETS

LIABILITIES

EQUITY

INCOME

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EXPENSE

Requirement (c): Unadjusted trial balance

Entity A
Unadjusted Trial Balance
December 31, 20x1
     
Accounts Debits Credits
Cash 1,920,000  
Accounts receivable 2,200,000  
Prepaid insurance 160,000  
Prepaid supplies 120,000  
Equipment 1,000,000  
Notes payable   500,000
Owner's capital   2,000,000
Owner's drawings 1,400,000  
Service fees   6,000,000
Salaries expense 1,200,000  
Utilities expense 500,000  

Totals
8,500,000 8,500,000

Requirement (d): Adjusting entries

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(i) Depreciation expense (1M ÷ 10 yrs.) 100,000
Accumulated depreciation 100,000
to record the depreciation expense for the year
(ii) Interest expense (500K x 12% x 6/12) 30,000
Interest payable 30,000
to accrue interest expense
(iii) Insurance expense (160K x 3/12) 40,000
Prepaid insurance 40,000
to recognize insurance expense
(iv) Supplies expense (120K – 40K) 80,000
Prepaid supplies 80,000
to recognize supplies expense

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Requirement (e): Worksheet

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Requirement (f): Closing entries

Dec. 31, Service fees 6,000,000

20x1 Salaries expense 1,200,000
Utilities expense 500,000
Depreciation expense 100,000
Interest expense 30,000
Insurance expense 40,000
Supplies expense 80,000
Income summary (‘squeeze’) 4,050,000
to close income and expense accounts to income summary
Dec. 31, Income summary 4,050,000
20x1 Owner’s equity 4,050,000
to close the income summary to equity
Dec. 31, Owner’s equity 1,400,000
20x1 Owner’s drawings 1,400,000
to close the drawings account

Requirement (g): Balance sheet and Income statement

Entity A
Balance Sheet
As of December 31, 20x1

ASSETS

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Cash ₱1,920,000
Accounts receivable 2,200,000
Prepaid insurance 120,000
Prepaid supplies 40,000
Equipment 1,000,000
Accumulated depreciation (100,000)
₱5,180,00
TOTAL ASSETS 0

LIABILITIES
Notes payable ₱500,000
Interest payable 30,000
TOTAL LIABILITIES 530,000

EQUITY
Owner's equity 4,650,000
TOTAL EQUITY 4,650,000

TOTAL LIABILITIES & ₱5,180,00

EQUITY 0

Entity A
Income Statement
For the month ended December 31, 20x1

INCOME
Service Fees ₱6,000,000

EXPENSES
Salaries expense (1,200,000)
Utilities expense (500,000)
Depreciation expense (100,000)
Interest expense (30,000)
Insurance expense (40,000)
Supplies expense (80,000)
TOTAL EXPENSES (1,950,000)

₱4,050,00
PROFIT FOR THE PERIOD 0

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NAME: Date:
Professor: Section: Score:

QUIZ 3: REVERSING ENTRIES

1. Which of the following adjustments cannot be reversed in the next accounting period?
a. Accruals for income or expense
b. Prepayments initially recorded using the expense method
c. Advanced collections initially recorded using the income method
d. Prepayments initially recorded using the asset method

2. Which of the following adjustments can be reversed in the next accounting period?
a. Adjusting entry to take up depreciation expense
b. Adjusting entry to record bad debts expense
c. Adjusting entry to record accrued interest income
d. All of these

Use the following information for the next three questions:

Entity A paid one-year insurance amounting to ₱160,000 on September 30, 20x1. Entity A uses the
“expense method” in recording prepayments.

3. What is the entry to record the prepayment on September 30, 20x1?

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4. What is the adjusting entry on December 31, 20x1?

5. What is the reversing entry in the next accounting period (i.e., 20x2)?

“Praise be to the God and Father of our Lord Jesus Christ, the Father of compassion and the God of all
comfort, who comforts us in all our troubles, so that we can comfort those in any trouble with the comfort we
ourselves have received from God.” (2 Corinthians 1:3-4)
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SOLUTIONS FOR QUIZ 3:

1. D
2. C

3.
Sept. 30, Insurance expense 160,000
20x1 Cash 160,000
to record the prepayment of insurance

4.
Dec. 31, Prepaid insurance (160,000 x 9/12) 120,000
20x1 Insurance expense 120,000
to recognize prepaid insurance

5.
Jan. 1, Insurance expense 120,000
20x2 Prepaid insurance 120,000
to reverse the adjusting entry for prepaid insurance

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