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
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
f. Four Star accrues income taxes using an estimated tax rate equal to 30% of the income for the
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
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
4. On the basis of the information you have, does Four Star appear to be a profitable business?
Explain your answer