E3-5 Drew Carey Company has the following balances in selected accounts on December 31,2008.

Accounts Receivable $ -0-
Accumulated Depreciation—Equipment -0-
Equipment 7,000
Interest Payable -0-
Notes Payable 10,000
Prepaid Insurance 2,100
Salaries Payable -0-
Supplies 2,450
Unearned Consulting Revenue 40,000
All the accounts have normal balances.The information below has been gathered at December 31, 2008.
1. Drew Carey Company borrowed $10,000 by signing a 12%, one-year note on September 1, 2008.
2. A count of supplies on December 31, 2008, indicates that supplies of $800 are on hand.
3. Depreciation on the equipment for 2008 is $1,000.
4. Drew Carey Company paid $2,100 for 12 months of insurance coverage on June 1, 2008.
5. On December 1, 2008, Drew Carey collected $40,000 for consulting services to be performed
from December 1, 2008, through March 31, 2009.
6. Drew Carey performed consulting services for a client in December 2008. The client will be
billed $4,200.
7. Drew Carey Company pays its employees total salaries of $9,000 every Monday for the preceding
5-day week (Monday through Friday). On Monday, December 29, employees were
paid for the week ending December 26. All employees worked the last 3 days of 2008.
(SO 4)
Prepare adjusting entries from
selected data.
Instructions
Prepare adjusting entries for the seven items

5656454

To prepare the adjusting entries, we need to analyze each item and determine the appropriate adjustment needed for each account. Let's go through each item one by one:

1. Drew Carey Company borrowed $10,000 by signing a 12%, one-year note on September 1, 2008.
This means that the company has an outstanding liability for the interest expense that has accrued since September 1, 2008, until December 31, 2008. To record this adjustment, we need to create an entry for the interest expense and the interest payable. The interest expense is calculated by multiplying the borrowed amount ($10,000) by the interest rate (12%) and the time period (4/12 since it has been 4 months from September 1 to December 31).

Interest Expense: $10,000 * 12% * 4/12 = $400
Interest Payable: $400

2. A count of supplies on December 31, 2008, indicates that supplies of $800 are on hand.
The supplies account needs to be adjusted to reflect the actual amount of supplies on hand. Currently, the supplies account shows a balance of $2,450. To adjust it, we can calculate the difference between the actual supplies on hand ($800) and the current balance ($2,450) and record it as a decrease in supplies.

Supplies Expense: $2,450 - $800 = $1,650
Supplies: $1,650 decrease

3. Depreciation on the equipment for 2008 is $1,000.
Depreciation is the allocation of the cost of an asset over its useful life. In this case, we need to record the depreciation expense for the year. The equipment account also needs to be adjusted to reflect the accumulated depreciation.

Depreciation Expense: $1,000
Accumulated Depreciation—Equipment: $1,000 increase

4. Drew Carey Company paid $2,100 for 12 months of insurance coverage on June 1, 2008.
The insurance coverage extends over 12 months, but as of December 31, only 7 months have passed. Therefore, we need to adjust the prepaid insurance account to reflect the value of the insurance coverage that still remains.

Insurance Expense: $2,100 / 12 * 5 = $875
Prepaid Insurance: $875 decrease

5. On December 1, 2008, Drew Carey collected $40,000 for consulting services to be performed from December 1, 2008, through March 31, 2009.
Since the company hasn't provided the consulting services yet, the revenue collected is considered unearned revenue or a liability. As each month passes, a portion of the unearned revenue becomes earned revenue. For the month of December, one-fourth of the revenue ($40,000 / 4) will be recognized as revenue.

Unearned Consulting Revenue: $40,000 - $10,000 = $30,000 (remaining unearned revenue)
Consulting Revenue: $10,000

6. Drew Carey performed consulting services for a client in December 2008. The client will be billed $4,200.
When the company performs services for a client, revenue needs to be recognized. In this case, the revenue is earned in December, so we need to record it.

Accounts Receivable: $4,200
Consulting Revenue: $4,200

7. Drew Carey Company pays its employees total salaries of $9,000 every Monday for the preceding 5-day week (Monday through Friday). On Monday, December 29, employees were paid for the week ending December 26. All employees worked the last 3 days of 2008.
Since the employees have already worked for three days in December, their salaries need to be accrued for those days since they haven't been paid yet.

Salaries Expense: $9,000 / 5 * 3 = $5,400
Salaries Payable: $5,400

These are the adjusting entries needed based on the given information. Remember to check your calculations and review the account balances before finalizing the entries.

Here are the adjusting entries for the seven items:

1. To record interest expense for 4 months on the note payable:

Interest Expense = $10,000 * 12% * (4/12) = $400
Interest Payable = $400

2. To adjust supplies on hand:

Supplies Expense = $2,450 - $800 = $1,650
Supplies = $800

3. To record depreciation on equipment:

Depreciation Expense = $1,000
Accumulated Depreciation—Equipment = $1,000

4. To recognize insurance expense for 7 months:

Insurance Expense = $2,100 / 12 * 7 = $1,225
Prepaid Insurance = $2,100 - $1,225 = $875

5. To recognize revenue for services performed:

Unearned Consulting Revenue = $40,000 - $4,200 = $35,800
Consulting Revenue = $4,200

6. To record salaries expense for the 3 days worked:

Salaries Expense = $9,000 * (3/5) = $5,400
Salaries Payable = $5,400

7. To record accrued salaries for the last 3 days of the year:

Salaries Expense = $9,000 * (3/5) = $5,400
Salaries Payable = $5,400

Note:
The balances in the accounts receivable and interest payable accounts are already $0, so no adjusting entries are required for them.