Question

The City of Ruth owns and operates an electric utility. The utility purchases new electric transmission lines for $6,000,000 so that it can provide electricity to new customers. This purchase will most likely:

a) Increase the utility's liabilities.
b) Decrease the utility's assets.
c) Increase the utility's expenses.
d) Increase the utility's infrastructure and long-term assets.

Answer 1

The purchase of new transmission lines for $6,000,000 by the City of Ruth's electric utility will increase the utility's infrastructure and long-term assets, as these lines are a capital investment providing future economic benefits.

Step-by-step explanation:

The question being asked relates to how the purchase of new electric transmission lines by the City of Ruth's electric utility will impact its financial statements. When the City of Ruth operates its electric utility and invests in new infrastructure such as electric transmission lines for $6,000,000, this purchase will most likely increase the utility's infrastructure and long-term assets. This is because the transmission lines will be used to provide services to customers for many years and their cost will be capitalized on the balance sheet as a tangible fixed asset, depreciated over the life of the asset. The purchase would not be treated as an expense in the period it is bought but as an asset that provides future economic benefits.