Lady Gaga Motors, Inc. commenced operations on July 1 of the current year. Since Lady Gaga is skilled in automotive matters but lacks any expertise in accounting, she hires a bookkeeper from a Facebook site. This bookkeeper has exaggerated his abilities and, on December 31, presented Lady Gaga with financial statements fraught with errors and a stated net income of $97,425. When her banker examined these statements, he brought up the following issues:

1. Why does the rent expense account have a balance of $84,000 when your rent is only $7,000 per month? You paid this rent on July 1.

2. Why is there no insurance expense on the income statement? Your balance sheet shows a balance of $36,000 that comes from a payment to Acme Insurance Agency on October 1 for an annual policy.

3. You paid $60,000 for manufacturing equipment on October 1 and recorded it on your balance sheet. Doesnt it need to have depreciation recorded?

4. On your balance sheet, you show $2,400 in office supplies were purchased on July 1. Have you used any of them?

5. You borrowed $50,000 from our bank on October 1 at an interest rate of 10%. Why are you not showing any interest expense on the income statement?

6. I noticed on your balance sheet that you have a liability of $18,000 that is listed as unearned revenue. I asked the bookkeeper where it came from and she told me that it was payment for an annual service contract paid by a local mortuary to maintain their hearses on a monthly basis. The payment was made to you on December 1.

7. You loaned your destitute cousin $36,000 to start a dog grooming business on September 1. The note is for nine months and has an interest rate of 12%. How much interest did you earn?

8. When I was examining your payroll records, I noticed that you showed no payroll for the last two days of the month. Your weekly payroll is $6,000 and is earned equally each day Monday through Friday.

The banker has instructed Lady Gaga to prepare the necessary adjusting entries to correct these errors. Assume that equipment has a useful life of 10 years and a salvage value of $6,000. Further, assume that there are $975 in office supplies on hand.

Required:

1. Record adjusting entries for each of the above events including explanations. If any event requires a reversing entry, please record it as well.

2. Compute the correct pretax income for Lady Gaga Fine Motors.