Use of a Trial Balance to Record Adjusting Entries in T Accounts

Four Star Video has been in the video rental business for five years. An unadjusted trial balance

at May 31, 2008, follows.

 

The following additional information is available:

a. Four Star rents a store in a shopping mall and prepays the annual rent of $7,200 on April 1

of each year.

b. The asset account Video Inventory represents the cost of videos purchased from suppliers.

When a new title is purchased from a supplier, its cost is debited to this account. When a title

has served its useful life and can no longer be rented (even at a reduced price), it is removed

from the inventory in the store. Based on the monthly count, the cost of titles on hand at the

end of May is $23,140.

c. The display stands have an estimated useful life of five years and an estimated salvage value

of $500.

d. Wages and salaries owed but unpaid to employees at the end of May amount to $1,450.

e. In addition to individual rentals, Four Star operates a popular discount subscription program.

Customers pay an annual fee of $120 for an unlimited number of rentals. Based on the $10 per

month earned on each of these subscriptions, the amount earned for the month of May is

$2,440.

f. Four Star accrues income taxes using an estimated tax rate equal to 30% of the income for the

month.

Required

1. Set up T accounts for each of the accounts listed in the trial balance. Based on the additional

information given, set up any other T accounts that will be needed to prepare adjusting

entries.

2. Post the month-end adjusting entries directly to the T accounts but do not bother to put the

entries in journal format first. Use the letters (a) through (f) from the additional information to

identify the entries.

3. Prepare a trial balance to prove the equality of debits and credits after posting the adjusting

entries.

4. On the basis of the information you have, does Four Star appear to be a profitable business?

Explain your answer