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, 2024:
1. Demello has a $10,000, 8% note receivable with a customer. The customer pays the interest on a monthly basis on the first of the month. Assume the customer pays the correct amount each month.
2. Demello pays its employees a total of $6,500 every second Friday. Employees work a five-day week, Monday to Friday, and are paid for all statutory holidays. Assume December 31, 2024, is a Friday. Employees were last paid 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, 2024, this customer owed Demello $3,375. Demello billed the customer on January 7, 2025, and collected the full amount on January 18, 2025.
4. Demello received the $485 December utility bill on January 10, 2025. The bill was paid on its due date, January 22, 2025.
5. Demello has a $25,000, 5% note payable. Interest is paid every six months, on April 30 and October 31. Assume that Demello made the correct interest payments on April 30, 2024, and October 31, 2024.

Instructions
For each of the above items, do the following:
a. Prepare the adjusting entries required on December 31, 2024.

b. Prepare the journal entries to record the related cash transactions in 2025. Assume all payments and receipts are made as indicated.

Taking It Further

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, 2024, if these accounts were not adjusted.