Question

Morrison Company experienced a business event that had the following effect on its accounting equation. Assets = Liabilities + Common Stock + Retained Earnings (25,000) = (25,000) + n/a + n/a Which of the events would have caused this effect?

1) A decrease in assets
2) An increase in liabilities
3) An increase in common stock
4) An increase in retained earnings

Answer 1

A decrease in assets by $25,000 which is used to pay off debts would lead to a corresponding decrease in liabilities by $25,000, without affecting common stock or retained earnings. The correct answer is 1.

Step-by-step explanation:

The Morrison Company experienced a business event that decreased assets by $25,000 and decreased liabilities by the same amount with no change in common stock or retained earnings. The event that would cause such an effect is an option 1) A decrease in assets. This could occur in a scenario where the company uses cash (an asset) to pay off a portion of its debts (a liability).

By doing so, both assets and liabilities decrease by the amount paid, which in this case is $25,000. There is no impact on common stock or retained earnings because this transaction solely involves the payment of a debt. The correct option is 1.