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
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, 2014. 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 |
Required:
1. For each of the items below, identify and analyze the necessary adjustment on May 31, 2014.
a. Four Star rents a store in a shopping mall and prepays the annual rent of $7,200 on April 1 of each year.
| Activity | - Select your answer -Operating Investing Financing |
| Accounts | - Select your answer -Prepaid Rent Increase, Rent Expense Increase Prepaid Rent Increase, Rent Expense Decrease Prepaid Rent Decrease, Rent Expense Increase Prepaid Rent Decrease, Rent Expense Decrease |
| Statement(s) | - Select your answer -Balance Sheet only Income Statement only Balance Sheet and Income Statement |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -(Accounts Payable) (Depreciation Expense) (Prepaid Insurance) (Prepaid Rent) (Rent Expense) (No Entry) | - Select your answer -(Accounts Payable) (Cash)(Prepaid Insurance)(Prepaid Rent)(Rent Expense) | - Select your answer -Income Taxes ExpenseIncome Taxes Payable)(Prepaid Insurance)(Prepaid Rent)(Rent Expense)(No Entry) | - Select your answer -Accounts PayableCashPrepaid InsurancePrepaid RentRent ExpenseNo EntryCorrect 8 of Item 2 | |||||||||||
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.
| Activity | - Select your answer -OperatingInvestingFinancingCorrect 1 of Item 3 |
| Accounts | - Select your answer -Video Inventory Increase, Video Expense IncreaseVideo Inventory Increase, Video Expense DecreaseVideo Inventory Decrease, Video Expense IncreaseVideo Inventory Decrease, Video Expense DecreaseCorrect 2 of Item 3 |
| Statement(s) | - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 3 |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -CashIncome Taxes ExpenseIncome Taxes PayableVideo ExpenseVideo InventoryNo EntryCorrect 1 of Item 4 | - Select your answer -Accounts PayablePrepaid RentRent ExpenseVideo ExpenseVideo InventoryNo EntryCorrect 3 of Item 4 | - Select your answer -CashPrepaid RentRent ExpenseVideo ExpenseVideo InventoryNo EntryCorrect 6 of Item 4 | - Select your answer -Accounts PayableCashRent ExpenseVideo ExpenseVideo InventoryNo EntryCorrect 8 of Item 4 | |||||||||||
c. The display stands have an estimated useful life of five years and an estimated salvage value of $500. Assume Four Star Video uses the straight-line method of depreciation.
| Activity | - Select your answer -OperatingInvestingFinancingCorrect 1 of Item 5 |
| Accounts | - Select your answer -Accumulated Depreciation-Display Stands Increase, Depreciation Expense IncreaseAccumulated Depreciation-Display Stands Increase, Depreciation Expense DecreaseAccumulated Depreciation-Display Stands Decrease, Depreciation Expense IncreaseAccumulated Depreciation-Display Stands Decrease, Depreciation Expense DecreaseCorrect 2 of Item 5 |
| Statement(s) | - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 5 |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -Accumulated Depreciation-Display StandsDepreciation ExpenseIncome Taxes ExpenseIncome Taxes PayableRent ExpenseNo EntryCorrect 1 of Item 6 | - Select your answer -Accumulated Depreciation-Display StandsDepreciation ExpenseIncome Taxes ExpensePrepaid RentRent ExpenseNo EntryCorrect 3 of Item 6 | - Select your answer -Accounts PayableAccumulated Depreciation-Display StandsDepreciation ExpenseIncome Taxes ExpenseIncome Taxes PayableNo EntryCorrect 6 of Item 6 | - Select your answer -Accounts PayableAccumulated Depreciation-Display StandsCashDepreciation ExpenseIncome Taxes ExpenseNo EntryCorrect 8 of Item 6 | |||||||||||
d. Wages and salaries owed but unpaid to employees at the end of May amount to $1,450.
| Activity | - Select your answer -OperatingInvestingFinancingCorrect 1 of Item 7 |
| Accounts | - Select your answer -Wages and Salaries Payable Increase, Wages and Salaries Expense IncreaseWages and Salaries Payable Increase, Wages and Salaries Expense DecreaseWages and Salaries Payable Decrease, Wages and Salaries Expense IncreaseWages and Salaries Payable Decrease, Wages and Salaries Expense DecreaseCorrect 2 of Item 7 |
| Statement(s) | - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 7 |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -Accounts PayablePrepaid RentRent ExpenseWages and Salaries ExpenseWages and Salaries PayableNo EntryCorrect 1 of Item 8 | - Select your answer -CashPrepaid InsurancePrepaid RentWages and Salaries ExpenseWages and Salaries PayableNo EntryCorrect 3 of Item 8 | - Select your answer -CashIncome Taxes ExpenseIncome Taxes PayableWages and Salaries ExpenseWages and Salaries PayableNo EntryCorrect 6 of Item 8 | - Select your answer -Accounts PayablePrepaid RentRent ExpenseWages and Salaries ExpenseWages and Salaries PayableNo EntryCorrect 8 of Item 8 | |||||||||||
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.
| Activity | - Select your answer -OperatingInvestingFinancingCorrect 1 of Item 9 |
| Accounts | - Select your answer -Customer Subscriptions Increase, Subscription Revenue IncreaseCustomer Subscriptions Increase, Subscription Revenue DecreaseCustomer Subscriptions Decrease, Subscription Revenue IncreaseCustomer Subscriptions Decrease, Subscription Revenue DecreaseCorrect 2 of Item 9 |
| Statement(s) | - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 9 |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -Customer SubscriptionsDepreciation ExpenseIncome Taxes ExpenseIncome Taxes PayableSubscription RevenueNo EntryCorrect 1 of Item 10 | - Select your answer -Customer SubscriptionsDepreciation ExpenseIncome Taxes ExpenseIncome Taxes PayableSubscription RevenueNo EntryCorrect 3 of Item 10 | - Select your answer -CashCustomer SubscriptionsPrepaid RentRent ExpenseSubscription RevenueNo EntryCorrect 6 of Item 10 | - Select your answer -Accounts PayableCashCustomer SubscriptionsPrepaid RentSubscription RevenueNo EntryCorrect 8 of Item 10 | |||||||||||
f. Four Star accrues income taxes using an estimated tax rate equal to 30% of the income for the month.
| Activity | - Select your answer -OperatingInvestingFinancingCorrect 1 of Item 11 |
| Accounts | - Select your answer -Income Taxes Payable Increase, Income Taxes Expense IncreaseIncome Taxes Payable Increase, Income Taxes Expense DecreaseIncome Taxes Payable Decrease, Income Taxes Expense IncreaseIncome Taxes Payable Decrease, Income Taxes Expense DecreaseCorrect 2 of Item 11 |
| Statement(s) | - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 11 |
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
| Balance Sheet | Income Statement | |||||||||||||
| Assets | = | Liabilities | + | Stockholders' Equity | Revenues | Expenses | = | Net Income | ||||||
| - Select your answer -CashDepreciation ExpenseIncome Taxes ExpenseIncome Taxes PayableVideo ExpenseNo EntryCorrect 1 of Item 12 | - Select your answer -Accounts PayableIncome Taxes ExpenseIncome Taxes PayablePrepaid RentRent ExpenseNo EntryCorrect 3 of Item 12 | - Select your answer -Accounts PayableCashIncome Taxes ExpenseIncome Taxes PayableRent ExpenseNo EntryCorrect 6 of Item 12 | - Select your answer -Accounts PayableIncome Taxes ExpenseIncome Taxes PayableVideo ExpenseVideo InventoryNo EntryCorrect 8 of Item 12 | |||||||||||
2. On the basis of the information you have, does Four Star appear to be a profitable business? - Select your answer -YesNo
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Financial Accounting An Introduction To Concepts Methods And Uses
Authors: Sidney Davidson, Roman L. Weil, Clyde P. Stickney
2nd Edition
0030452961, 978-0030452963
