How Transactions Affect a Balance Sheet — Practice Questions

By Kenneth Boyd, Kate Mooney

An accountant is responsible for capturing business transactions, and determining the financial effect of those transactions on a company’s balance sheet. Using the following balance sheet, see if you can calculate the impact of different transactions on a fictitious power company.

Practice questions

Use the following information to answer the questions. The following is a condensed balance sheet for Green Power, Inc. for the fiscal year 2015:

  • Cash: $125,000

  • Accounts receivable: $150,000

  • Inventory: $200,000

  • Property, plant, and equipment: $330,000

  • Total assets: $805,000

  • Operating liabilities: $150,000

  • Interest-bearing liabilities: $160,000

  • Owners’ invested capital: $120,000

  • Owners’ retained earnings: $375,000

  1. Green Power, Inc. received $50,000 cash as a capital contribution from one of its owners. What impact did this transaction have on the balance sheet?

  2. Green Power, Inc. took out a bank loan for $100,000 on January 1. The terms of the loan require Green Power to repay the loan in full in three years, plus make annual interest payments of $8,000 on December 31. What impact did this transaction have on the balance sheet on the day the company took out the loan?

Answers and explanations

  1. Cash increased to $175,000, and owners’ invested capital increased to $170,000.

    The $50,000 cash contribution increased the cash balance and the owners’ invested capital balance.

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  2. Cash increased to $225,000, and interest-bearing liabilities increased to $260,000.

    Taking out a loan gives the company cash, so it increases cash and liabilities because the company now has to pay the loan back to the bank.

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