Larkspur, Inc. had the following account balances at year-end: Cost of Goods Sold $62,850; Inventory $16,850; Operating Expenses $33,020; Sales Revenue $118,730; Sales Discounts $1,140; and Sales Returns and Allowances $1,700. A physical count of inventory determines that merchandise inventory on hand is $12,850.

Prepare the adjusting entry necessary as a result of the physical count.

Prepare closing entries.