FA – May 2018 – L1 – SA – Q2 – Recording Financial Transactions

Analyzes the impact of a purchase on the assets and liabilities of a business.

Question

Adeyemi Boat Shop bought a N70,000 electric hoist to lift engines out of boats. The Boat Shop paid N20,000 in cash for the hoist and signed a note to pay the balance in 90 days. This transaction will cause:
A. The Boat Shop’s assets to increase by N70,000 and liabilities to increase by N50,000.
B. No change in owners’ equity but a N50,000 increase in both assets and liabilities.
C. Assets to increase by N50,000 and owners’ equity to decrease by the same amount.
D. No change in total assets, but a N50,000 increase in liabilities.
E. Both assets and liabilities decrease by N50,000.

Answer

Explanation:
Option B is correct because the Boat Shop’s total assets increase by N50,000 in value after subtracting the N20,000 cash payment (which was made for the hoist) from the total purchase price of N70,000. Additionally, the liabilities also increase by N50,000, representing the note payable. This leaves no immediate change in the owner’s equity.

Tags: Assets, Liabilities, Transaction Analysis
Level: Level 1

Uploader: Theophilus