FA – May 2016 – L1 – SA – Q5 – Financial Statements Preparation

A question about the effect of taking a loan on an entity's financial statements.

Question

Which of the following will be the effect of taking a loan from the bank by an entity?
A. Increase in both liabilities and equity
B. Decrease in assets and increase in liabilities
C. Decrease in both liabilities and equity
D. Increase in both assets and liabilities
E. Increase in assets and decrease in liabilities

Answer

Answer:
D. Increase in both assets and liabilities

Explanation:
When an entity takes a loan from the bank, both the entity’s assets (cash or bank balance) and its liabilities (loan or debt) increase. Equity is unaffected at the point of borrowing.

Tags: Assets, Liabilities, Loan
Level: Level 1

Topic: Financial Statements Preparation
Series: MAY 2016

Uploader: Kwame Aikins

FA – May 2016 – L1 – SA – Q5 – Financial Statements Preparation

A question about the effect of taking a loan on an entity's financial statements.

Explanation:
When an entity takes a loan from the bank, both the entity’s assets (cash or bank balance) and its liabilities (loan or debt) increase. Equity is unaffected at the point of borrowing.

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FA – May 2016 – L1 – SA – Q5 – Financial Statements Preparation

A question about the effect of taking a loan on an entity's financial statements.

Explanation: When an entity takes a loan from the bank, both the entity’s assets (cash or bank balance) and its liabilities (loan or debt) increase. Equity is unaffected at the point of borrowing.

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Explanation:
When an entity takes a loan from the bank, both the entity’s assets (cash or bank balance) and its liabilities (loan or debt) increase. Equity is unaffected at the point of borrowing.