Question

Marvin company negotiated the purchase of a new building for $250,000. Marvin paid a $100,000 down payment and will pay off the remainder over seven years. What affect does this transaction have on the accounting equation?

a. $250,000 net increase in assets and $150,000 increase in liabilities
b. $100,000 net increase in assets and $100,000 increase in liabilities
c. $100,000 net decrease in assets and $150,000 decrease in liabilities
d. $150,000 net increase in assets and $150,000 increase in liabilities

Answer 1

In the given transaction Marvin Company has purchased a new building for $250,000. Marvin paid a $100,000 down payment and will pay off the remainder over seven years it means the balance (250000-100000) = 150,000 is a liability for Marvin company.

So there is an Increase in the asset by $250,000 due to purchase of the building and there is a decrease in assets by $100,000 due to the payment of cash. Hence the Net increase in the assets is (250,000-100,000) = $150,000.

And there is an increase in the liabilities by $150,000.

Hence the correct answer is:

d. $150,000 net increase in assets and $150,000 increase in liabilities