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

Answer 1

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
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