Question

Establishing a note receivable by loaning cash to another company will have which of the following net effect on the accounting equation?

A.Increase assets; No effect on liabilities; Increase stockholders' equity

B. Increase assets; No effect on liabilities; No effect on stockholders' equity

C.No effect on assets; No effect on liabilies; Decrease stockholders' equity

D.No effect on assets; No effect on liabilies; No effect on stockholders' equity

Answer 1

Establishing a note receivable by loaning cash to another company results in an increase in assets, with no effect on liabilities or stockholders' equity. Option B is correct.

Step-by-step explanation:

When a company, such as Singleton Bank, establishes a note receivable by loaning cash to another company, like Hank's Auto Supply, the net effect on the accounting equation is to increase assets, while there is no effect on liabilities or stockholders' equity.

This is because the note receivable is considered an asset as it is expected to generate future income through interest. The cash asset decreases when loaned out, but it is replaced by the note receivable for the same amount, maintaining the balance in assets.

In our example, Singleton Bank lends $9 million to Hank's Auto Supply, recording this loan as an asset on its balance sheet. When Hank's Auto Supply deposits the loan in its checking account, the deposits at First National rise by $9 million, which is shown on their balance sheet as an asset increase.