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.

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Four Star Video Unadjusted Trial Balance May 31, 2008 Debit Credit 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 Totals $49,260 $49,260