Demello & Associates records adjusting entries on an annual basis. The company has the following information available on accruals that must be recorded for the year ended December 31, 2021:

1. Demello has a $10,000, 8% note receivable with a customer. The customer pays the interest on a monthly basis on the fi rst of the month. Assume the customer pays the correct amount each month.

2. Demello pays its employees a total of $6,500 every second Wednesday. Employees work a five-day week, Monday to Friday, and are paid for all statutory holidays. 

December 31, 2021, is a Friday. Employees were paid on Wednesday, December 29, 2021, up to the Friday of the prior week.

3. Demello has a contract with a customer where it provides services prior to billing the customer. On December 31, 2021, this customer owed Demello $3,375. Demello billed the customer on

January 7, 2022, and collected the full amount on January 18, 2022.

4. Demello received the $485 December utility bill on January 10, 2022. The bill was paid on its due date, January 22, 2022.

5. Demello has a $25,000, 5% note payable. Interest is paid every six months, on October 31 and

April 30. Assume that Demello made the correct interest payment on October 31, 2020, and April 30, 2021.

Instructions

For each of the above items, do the following:

a. Prepare the adjusting journal entries required on December 31, 2021.

b. Prepare the journal entry to record the related cash transaction in 2022. Assume all payments and receipts are made as indicated.

Indicate which elements in the financial statements (assets, liabilities, owner’s equity, revenue, expenses, and profit) would be either understated or overstated at December 31, 2021, if the accounts were not adjusted.