Dotty, with drop of sherry drunk (7)
I believe the answer is:
spotted
'dotty' is the definition.
(covered in spots or dots)
'with drop of sherry drunk' is the wordplay.
'with' means one lot of letters go next to another.
'drop of' suggests taking the first letters.
'drunk' becomes 'potted' (potted can mean drunk or intoxicated).
The first letter of 'sherry' is 's'.
's' put next to 'potted' is 'SPOTTED'.
(Other definitions for spotted that I've seen before include "Espied" , "Saw; speckled" , "Saw; mottled" , "Seen; saw" , "Observed" .)