Following is a partial list of financial statement items from the records of Starnes Company at December 31, 2012, before adjustments:

Prepaid rent ......... $20,000

Prepaid insurance ........12,000

Service revenue ........35,000

Wages expense ......... 8,000

Unearned service revenue ....18,000

Interest expense ....... 5,000

Additional information includes the following:

• The insurance policy indicates that on December 31, 2012, only five months remain on the 12-month policy that originally cost $12,000.

• Starnes has a note payable with $2,500 of interest that must be paid on January 1, 2013. No interest expense has been recorded for this note.

• The accounting records show that two-thirds of the service revenue paid in advance by a customer on March 1 has now been earned.

• On August 1, the company paid $20,000 for rent for 10 months beginning on August 1.

• At year end, Starnes Company owed $500 worth of salaries to employees for work done in December. This has not been recorded or paid. The next payday is January 3, 2013.

Requirements

1. Use an accounting equation worksheet to record the adjustments that must be made prior to the preparation of the financial statements for the year ended December 31, 2012.

2. For the accounts shown, calculate the account balances that would be shown on Starnes’ financial statements for the year ended December 31, 2012; balance sheet at December 31, 2012.