Can't tell from the pics. Is it not square to the other space or not level? Or neither?
I think a couple of pieces of thin flat stock would do it, one on the t&g ceiling to bring it forward a bit more, and another piece scribed to the drywall ceiling to close the gap. Then, if needed some 1/2" quarter round at the wood/drywall joint (or small cove or whatever).
Alternative is to plaster right up to the wood, matching the level of the sheetrock ceiling, IOW floating the ceiling until it meets the wood. Use Structolite and Durabond.
Casey

It looks like you could take a 2X4 and match the height of the t&g ceiling on one edge and an taper down to the thickness of a t&g board on the other edge. Round the edges to match the look of the t&g and mount it to the drywall ceiling. It looks like you have to cut at least one of the plywood furring strips flush.

If I am interpreting the pictures correctly, seems to me extending the ceiling T&G by one more board---so the gap is covered is the easiest.

You can bend the T&G a bit by removing some of the shoulders of the groove piece on the back and shaving a bit off the tongue. That keeps the spacing close to the flat parts.

Thyen use similar trim as you use on the walls to finish the end.

Are you planning to continue the T&G into the hallway, or are you just looking for a neat way to cap it off?

One idea that occurs to me, maybe more involved than you'd like, is to build a sort of a false header, maybe 8" or so high, going across the opening into the hallway. Cover it in drywall, paint it the color of the walls, and let the hall and cathedral ceilings each butt into it.

Wow, four different ideas to close the off-levelness, all more elegant than mine had been. Thanks!

None of those will help with the out-of-squareness, though. Are you saying it doesn't matter if you look at the finished product and the last ceiling board is obviously tapered? Or, alternatively, that where that last board meets the hallway it does so out of square (so long as all gaps are covered by scribing or trim)?

The 2X4 idea should look just like another t&g board connecting the cathedral ceiling angle to the horizontal ceiling. The width should be parallel to the t&g pattern. Since it appears that you are beyond the intersection with the hall, the out of squareness should be unnoticible. Work by trimming the existing t&g spacers etc. so that the 2X4 rests flat against the hall ceiling and the edge of the t&g and scribe the 2X4 to meet the t&g. Cut with a table saw to thickness then cut the slope and rout the edges. If the thickness is consistent, it could be done in one cut. If not, it is more difficult, but doable. Poplar would probably be a good choice for the 2X4 so it can be finished to match the t&g. Good luck.