Four Star Video has been in the video rental business for five years. The following is a

Question:

Four Star Video has been in the video rental business for five years. The following is a list of accounts for Four Star Video at May 31, 2017. It reflects the recurring transactions for the month of May but does not reflect any month-end adjustments.

Cash ................................. $ 4,000

Prepaid Rent ......................... 6,600

Video Inventory ................... 25,600

Display Stands ...................... 8,900

Accumulated Depreciation ........ 5,180

Accounts Payable .................. 3,260

Customer Subscriptions ............ 4,450

Capital Stock ........................ 5,000

Retained Earnings ................ 22,170

Rental Revenue .................... 9,200

Wage and Salary Expense ........ 2,320

Utilities Expense .................. 1,240

Advertising Expense ................ 600

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 added 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 fee on each of these subscriptions, the amount recognized 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. For each of the items of additional information, (a) through (f), identify and analyze the necessary adjustment on May 31, 2017.

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

Explain your answer.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...