Problem 8-31A (Static) Purchase and use of tangible asset: three accounting cycles, straight-line depreciation LO 8-2, 8-7, 8-8

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. Assume all transactions were in cash.

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 wreckers 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 wreckers 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

1. 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.
2. 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.