Question

The following transactions pertain to Accounting Solutions Inc. Assume the transactions for the purchase of the computer and any capital improvements occur on January 1 each year. Year 1 Acquired $70,000 cash from the issue of common stock. Purchased a computer system for $22,800. It has an estimated useful life of five years and a $2,520 salvage value. Paid $1,900 sales tax on the computer system. Collected $34,590 in fees from clients. Paid $1,050 in fees for routine maintenance to service the computers. Recorded double-declining-balance depreciation on the computer system for Year 1. Year 2 Paid $960 for repairs to the computer system. Bought off-site backup services to maintain the computer system, $1,160. Collected $37,590 in fees from clients. Paid $910 in fees to service the computers. Recorded double-declining-balance depreciation for Year 2. Year 3 Paid $2,700 to upgrade the computer system, which extended the total life of the system to six years. The salvage value did not change. Paid $830 in fees to service the computers. Collected $37,890 in fees from clients. Recorded double-declining-balance depreciation for Year 3. Required a. Record the above transactions in a horizontal statements model. b-1. Prepare income statements for Year 1, Year 2, and Year 3. b-2. Prepare statements of changes in stockholders' equity for Year 1, Year 2, and Year 3. b-3. Prepare balance sheets for Year 1, Year 2, and Year 3. b-4. Prepare statements of cash flows for Year 1, Year 2, and Year 3.

Answer 1

a.			Accounting solutions Inc.
			Horizontal statements model-Year 1
	Event Year 1	Balance sheet	Income statement	Statement of cash flows
	Assets	=	Stockholder's equity	Revenue	-	Expense	=	Net income
	Cash	+	Equipment	-	Accumulated depreciation	=	Common stock	+	Retained earnings
	1	70000						70000								70000	FA
	2	-22800		22800												-22800	IA
	3	-1900		1900												-1900	IA
	4	34590								34590	34590		0		34590	34590	OA
	5	-1050								-1050	0		1050		-1050	-1050	OA
	6					9880				-9880	0		9880		-9880	0	NA
	Bal.	78840		24700		9880		70000		23660	34590		10930		23660

6
Depreciation rate=2*(1/Useful life)=2*(1/5)=2*0.20=0.40=40%
Depreciation expense=Book value at the end of year 1*Depreciation rate
Book value at the end of year 1=22800+1900=$ 24700
Depreciation expense=24700*40%=$ 9880

		Accounting solutions Inc.
		Horizontal statements model-Year 2
Event Year 2	Balance sheet	Income statement	Statement of cash flows
Assets	=	Stockholder's equity	Revenue	-	Expense	=	Net income
Cash	+	Equipment	-	Accumulated depreciation	=	Common stock	+	Retained earnings
Bal.	78840		24700		9880		70000		23660
1	-960								-960	0		960		-960	-960	OA
2	-1160								-1160	0		1160		-1160	-1160	OA
3	37590								37590	37590		0		37590	37590	OA
4	-910								-910	0		910		-910	-910	OA
5					5928				-5928	0		5928		-5928	0	NA
Bal.	113400		24700		15808		70000		52292	37590		8958		28632

5
Depreciation expense=Book value at the end of year 2*Depreciation rate
Book value at the end of year 2=Cost-Accumulated depreciation=24700-9880=$ 14820
Depreciation expense=14820*40%=$ 5928

Event Year 3 Bal. Statement of cash flows Cash Accounting solutions Inc. Horizontal statements model-Year 3 Balance sheet Income statement Assets = Stockholder's equity Accumulated Common Retained Net + Equipment - depreciation = stock + earnings Revenue Expense income 113400 24700 15808 70000 52292 -2700 -2700 -830 -830 0 830 -830 37890 37890 37890 0 37890 4637 -4637 0 4637 -4637 147760 24700 17745 70000 84715 378901 5467 32423 1 -2700 IA 2 -830 OA 3 37890 OA O NA 4 Bal. Depreciation expense=Book value at the end of year 3*Depreciation rate Book value at the end of year 3=Cost-Accumulated depreciation=24700-(15808-2700)=24700-13108=$ 11592 Depreciation expense=11592*40%=$ 4637 b-1. Accounting solutions Inc. Income statement For the year ended year 1 Year 1 34590 Year 2 Year 3 Service revenue a 37590 37890 Expenses

a 34590 37590 37890 Service revenue Expenses Depreciation expense Maintenance expense Service fee expense 9880 4637 1050 5928 1160 1870 (960+910) 8958 830 b 10930 Total expenses Net income 5467 32423 a-b 23660 28632 b-2. Accounting solutions Inc. Statements of changes in stockholders' equity For the year ended year 1 Year 1 Year 2 Year 3 Beginning common stock 0 700001 70000 Plus:Stock issued 70000 0 0 Ending common stock a 70000 70000 70000 Beginning retained earnings 0 23660 52292 Plus:Net income 23660 28632 32423 Ending retained earnings b 23660 52292 84715 Total stockholder's equity a+b 93660 122292 154715 b-3. Accounting solutions Inc. Balance sheet For the year ended year 1

For the year ended year 1 Year 1 Year 2 Year 3 Assets 78840 113400 147760 24700 24700 15808 9880 24700 17745 154715 93660 122292 Cash Equipment Less:Accumulated depreciation Total assets Liabilities Stockholder's equity Common stock Retained earnings Total stockholder's equity Total liabilities and stockholder's equity 70000 700001 70000 52292 23660 122292 93660 93660 84715 154715 154715 122292 Year 2 Year 3 b-4. Accounting solutions Inc. Statement of cash flows Year 1 Cash flows from operating activities Cash inflow from revenue 34590 Cash outflow for expenses 1050 Net cash flows operating activities 33540 37590 3030 37890 830 37060 a 34560 Cash flows from investing activities Cash outflow for equipment b -24700 0 -2700

Cash flows from investing activities Cash outflow for equipment b -24700 0 -2700 Cash flows from financing activities Cash inflow from stock issue с 70000 0 34560 34360 Net changes in cash a+b+c Plus:Beginning cash balance Ending cash balance 78840 0 78840 113400 78840 113400 147760