The following transactions relate to Academy Towing Service. Assume the transact

Question

The following transactions relate to Academy Towing Service. Assume the transactions for the purchase of the wrecker and any capital improvements occur on January 1 of each year. 2016 1. Acquired $79,000 cash from the issue of common stock. 2. Purchased a used wrecker for $41,000. It has an estimated useful life of three years and a $10,000 salvage value. 3. Paid sales tax on the wrecker of $5,000. 4. Collected $65,100 in towing fees. 5. Paid $12,900 for gasoline and oil. 6. Recorded straight-line depreciation on the wrecker for 2016. 7. Closed the revenue and expense accounts to Retained Earnings at the end of 2016. 2017 1. Paid for a tune-up for the wrecker’s engine, $1,800. 2. Bought four new tires, $2,150. 3. Collected $71,000 in towing fees. 4. Paid $18,900 for gasoline and oil. 5. Recorded straight-line depreciation for 2017. 6. Closed the revenue and expense accounts to Retained Earnings at the end of 2017. 2018 1. Paid to overhaul the wrecker’s engine, $5,700, which extended the life of the wrecker to a total of four years. The salvage value did not change. 2. Paid for gasoline and oil, $20,000. 3. Collected $74,000 in towing fees. 4. Recorded straight-line depreciation for 2018. 5. Closed the revenue and expense accounts at the end of 2018

Explanation / Answer

Solution:

Using a Horizontal Statements model like the following one to show the effect of these transactions on the elements of financial statements:

Academy Towing Service

Horizontal Statements Model

Academy Towing Service

Horizontal Statements Model

Event Assets = Liabilities + Equity Net Income Cash Flow 2016 1 79,000 = + 79,000 + FA 2 -41,000 = + - IA 41,000 = + NA 3 -5,000 = + - 5,000 = + 4 65,100 = + 65,100 + OA 5 -12,900 = + -12,900 - OA 6 -10,333 = + -10,333 + OA 7 = + 41,867 -41,867 + OA 120,867 = 0 + 120,867 0 2017 1 -1,800 = + -1,800 - OA 2 -2,150 = + -2,150 - OA 3 71,000 = + 71,000 + OA 4 -18,900 = + -18,900 - OA 5 -10,333 = + -10,333 + OA 6 = + 37,817 -37,817 + OA 37,817 = 0 + 37,817 0 2018 1 5,700 = + - IA -5,700 = + 2 -20,000 = + -20,000 - OA 3 74,000 = + 74,000 + OA 4 -10,333 = + -10,333 + OA 5 = + 43,667 -43,667 + OA 43,667 = 0 + 43,667 0

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