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.

1. For each of the items below, identify and analyze the necessary adjustment on May 31, 2017.

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. Assume Four Star Video uses the straight-line method of depreciation.

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.

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

Cash Prepaid Rent $4,000 6,600 25,600 8,900 Video Inventory Display Stands Accumulated Depreciation 5,180 Accounts Payable 3,260 4,450 Customer Subscriptions Capital Stock Retained Earnings 5,000 22,170 9,200 2,320 Rental Revenue Wage and Salary Expense Utilities Expense 1,240 Advertising Expense 600 Activity Accounts Statement(s) Balance Sheet Income Statement Stockholders' Net Assets Equity Revenues Expenses Income Activity Accounts Statement(s) Activity Accounts Statement(s) Activity Accounts Statement(s) Activity Accounts Statement(s) Activity Accounts Statement(s)