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.

Year 1
1. Acquired $70,000 cash from the issue of common stock.
2. Purchased a used wrecker for $32,000. It has an estimated useful life of three years and a $5,000 salvage value.
3. Paid sales tax on the wrecker of $3,000.
4. Collected $56,100 in towing fees.
5. Paid $12,000 for gasoline and oil.
6. Recorded straight-line depreciation on the wrecker for Year 1.
7. Closed the revenue and expense accounts to Retained Earnings at the end of Year 1.

Year 2
1. Paid for a tune-up for the wrecker’s engine, $900.
2. Bought four new tires, $1,250.
3. Collected $62,000 in towing fees.
4. Paid $18,000 for gasoline and oil.
5. Recorded straight-line depreciation for Year 2.
6. Closed the revenue and expense accounts to Retained Earnings at the end of Year 2. 

Year 3
1. Paid to overhaul the wrecker’s engine, $4,800, 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, $19,100.
3. Collected $65,000 in towing fees.
4. Recorded straight-line depreciation for Year 3.
5. Closed the revenue and expense accounts at the end of Year 3.

Required
a. Use a horizontal statements model like the following one to show the effect of these transactions on the elements of financial statements. Use + for increase, − for decrease, and NA for not affected. The first event is recorded as an example.

b. Prepare an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for Year 1, Year 2, and Year 3.

Transcribed Image Text:

Year 1 Event No. Stk. Equlty Llabilitles Net Inc. Cash Flow Assets 1. NA NA + FA