Question

When a company buys equipment for $150,000 and pays for one third in cash and the other two thirds is financed by a note payable, which of the following are the effects on the accounting equation?
A. Total assets decrease $50,000.
B. Total liabilities increase $150,000.
C. Total liabilities decrease $50,000.
D. Total assets increase $100,000

Answer 1

Answer:

D. Total assets increase $100,000

Explanation:

When a company buys equipment for 150,000, its asset first increases by 150,000 because it is adding an asset to its asset list which is worth 150,000 but because one third is paid in cash which is an asset, the asset column decreases by (1/3*150,000)=50,000 as 50,000 cash is leaving the company. SO total assets increase by 100,000.

Answer 2

When a company buys equipment for and pays for one third in cash and the other two thirds is financed by a note payable, total assets will increase by the $100,000 in accounting equation, Option D is correct.

What is accounting equation?

Accounting equation is considered as the foundation of double entry system because it give rise to double effect concept. In accounting equation, all the assets are equal to the liabilities and owner's equity.

The equation is denoted by:

$\rm Assets = Owner's equity + Liability$

The core concept of accounting equation states that, if there is a increase in asset, there will be a corresponding effect on the other half of equation.

$\rm Total \:Assets\: increase = Increase\: in\: asset - Outflow\: of \:cash\\\\Total \:Assets\: increase = \ 150,000 - \ 50,000\\\\Total \:Assets\: increase = \ 100,000$

Initially the assets are increasing by $150,000 due to the purchase of equipment, but one third of the payment i.e. $50,000 will decrease the cash balance. Therefore the ultimate effect on the total assets will be an increase of $100,000.

Hence the correct option is D.

Learn more about the accounting equation here:

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