Use of Account Balances as a Basis for Adjustments Four Star Video has been in the video rental business for fi ve years. The following is a list of accounts for Four Star Video at May 31, 2010. It refl ects the recurring transactions for the month of May but does not refl ect 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 fi ve 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. For each of the items of additional information,

(a) through (f), identify and analyze the necessary adjustment on May 31, 2010.

2. On the basis of the information you have, does Four Star appear to be a profi table business? Explain your answer.

AppendixLO1