Question

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, 2016, follows.

Four Star Video Unadjusted Trial Balance May 31, 2016
	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

The following additional information is available:

Four Star rents a store in a shopping mall and prepays the annual rent of $7,200 on April 1 of each year.

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.

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.

Wages and salaries owed but unpaid to employees at the end of May amount to $1,450.

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 fee on each of these subscriptions, the amount recognized for the month of May is $2,440.

Four Star accrues income taxes using an estimated tax rate equal to 30% of the income for the month.

Answer 1

Formula sheet

A	B	C	D	E	F	G	H
2
3
4		Four Star Video
5		Unadjusted Trial Balance
6		42521
7			Debit	Credit
8		Cash	4000
9		Prepaid Rent	6600
10		Video Inventory	25600
11		Display Stands	8900
12		Accumulated Depreciation		5180
13		Accounts Payable		3260
14		Customer Subscriptions		4450
15		Capital Stock		5000
16		Retained Earnings		22170
17		Rental Revenue		9200
18		Wage and Salary Expense	2320
19		Utilities Expense	1240
20		Advertising Expense	600
21		Totals	49260	49260
22
23		Adjusting Entries Will be as follows:
24
25		Account	Debit	Credit
26		Rent Expense	=7200/12		=7200/12
27		Prepaid Rent		=D26
28
29		Video Inventory Expense	=25600-23140		=25600-23140
30		Video Inventory		=D29
31
32		Depreciation Expense	=(8900-500)/5		=(8900-500)/5
33		Accumulated Depreciation		=D32
34
35		Wage and Salaries Expense	1450
36		Wage and Salaries Payable		=D35
37
38		Customer Subscriptions	2440
39		Rental Revenue		=D38
40
41
42		To calculated the income tax payable, the taxable income needs to be
43		calculated using the unadjusted trial balance and adjusting entries.
44
45		Rental Revenue		=E17+E39
46		Wage and Salary Expense	=D18+D35
47		Utilities Expense	=D19
48		Advertising Expense	=D20
49		Rent Expense	=D26
50		Video Inventory Expense	=D29
51		Depreciation Expense	=D32
52		Total Expense		=SUM(D46:D51)
53		Total Taxable Income		=E45-E52	=E45-E52
54
55		Tax Rate	0.3
56
57		Tax Expense	=E53*D55	=E53*D55
58
59		Hence adjusting entry for accrued tax will be:
60		Account	Debit	Credit
61		Tax Expense	=D57
62		Tax Payable		=D61
63