Transaction Analysis — Good Service Corp.: 23-Ind-B7 Financial and Managerial Accounting, May 2013, Q1

Question 1: Transaction Analysis — Good Service Corp. (28 marks)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

Given. Ten transactions for the first year (2011) of Good Service Corp., a newly incorporated company that uses accrual accounting.

Find. The account(s) affected, the dollar amount, and the classification (CA/NCA/CL/NCL) of each transaction, recorded via the expanded accounting equation Assets = Liabilities + Share Capital + Revenue − Expenses − Dividends.

Approach. Analyze each transaction's effect on the expanded accounting equation one at a time, classify every account by whether it will be settled/consumed within one year of the Dec 31/11 balance-sheet date (current) or later (non-current), then total each column and confirm the equation still balances.

#	Accounts affected & classification	Effect on the equation
1	Cash (CA) ↑; Share Capital ↑	+$36,000 cash for 3,000 shares — a share issuance, not revenue.
2	Cash (CA) ↑; Note Payable (NCL) ↑	+$10,000. Due Dec 31/2013 — more than one year from the Dec 31/11 balance-sheet date, so non-current.
3	Cash (CA) ↓ $20,000; Supplies (CA) ↑ $20,000	An asset-for-asset exchange (cash converted to supplies inventory) — no effect on Liabilities, Share Capital, Revenue, Expenses or Dividends; the equation still balances because both sides are assets.
4	Cash (CA) ↑ $94,000; Accounts Receivable (CA) ↑ $6,000; Revenue ↑ $100,000	Under accrual accounting, revenue is recognized when earned (services performed/billed), not when cash is received — the $6,000 still owing is an asset (A/R), not a reduction of revenue.
5	Supplies (CA) ↓ $5,000; Expenses ↑ $5,000	Supplies expense — the matching principle requires the cost of supplies consumed to be expensed in the period the related revenue is earned, not when the supplies were originally purchased.
6	Cash (CA) ↓ $54,000; Expenses ↑ $54,000	Other service expenses, paid and incurred in the same period.
7	Cash (CA) ↓ $1,000; Expenses ↑ $1,000	Interest expense on the note (10% × $10,000 = $1,000 — exactly one full year's interest, paid on the Dec 31 due date, so no accrual is left outstanding).
8	Cash (CA) ↓ $8,000; Expenses ↑ $8,000	Income tax expense — stated to be "all of the income tax for the year," so no tax payable remains at year-end.
9	Dividends Payable (CL) ↑ $10,000; Dividends ↑ $10,000	Declaring a dividend creates a present legal obligation to shareholders (a liability) and reduces retained earnings; it is not an expense.
10	Cash (CA) ↓ $10,000; Dividends Payable (CL) ↓ $10,000	Settling the liability created in transaction 9 — the Dividends account itself is not touched again.

All ten transactions require an entry — none qualifies for a "no entry" treatment here (contrast Question 2(f) below, where an order for supplies is correctly left off the books because no exchange has yet occurred).

Year-end balance	Amount
Cash	$47,000
Accounts receivable	$6,000
Supplies	$15,000
Total assets	$68,000
Note payable (NCL)	$10,000
Dividends payable (CL)	$0 (declared and paid within the period)
Share capital	$36,000
Revenue	$100,000
Expenses	$68,000
Dividends	$10,000
Liabilities + Share Capital + Revenue − Expenses − Dividends	$68,000 — balances with total assets

Concept & Theory

Topic. Accrual-basis transaction analysis via the expanded accounting equation.

Key relations. Assets = Liabilities + Share Capital + Revenue − Expenses − Dividends; the matching principle (expense recognition follows the revenue it helped earn, not the cash payment date); the revenue-recognition principle (recognize when earned/billed, not when collected).

Why this works. Every transaction is a real-world event that must keep both sides of the equation equal by construction — recording it as a signed change to the six equation components, rather than jumping straight to a T-account, makes it easy to see at a glance whether an entry is asset-for-asset (transaction 3), income-statement-affecting (4–8), or equity-affecting (9–10), and it is the same lens the account-classification requirement (CA/NCA/CL/NCL) hangs on: an item is "current" precisely when it will be realized/settled within one year of the balance-sheet date being prepared.

Common pitfall. Recording transaction 4 as $94,000 of revenue (cash received) instead of the full $100,000 earned; treating the dividend declaration (9) as an expense rather than a distribution of profit that bypasses the income statement entirely.

Source. Libby, Libby & Short, Financial Accounting (Canadian ed.), ch. 2–3 (the accounting equation, accrual accounting and the matching/revenue-recognition principles).

Question 1 of 7: Transaction Analysis — Good Service Corp.

Question 1: Transaction Analysis — Good Service Corp. (28 marks)