Question

The company purchases land by paying half in cash and signing a note payable for the other half.

(Increase, Decrease, No effect)
a) Assets
b) Liabilities
c) Owner's Equity

Answer 1

The purchase of land with half cash and half note payable results in an increase in both Assets and Liabilities, with no effect on Owner's Equity. Comparable personal finance scenarios show how equity is calculated when considering property values and debts owed.

Step-by-step explanation:

When a company purchases land by paying half in cash and signing a note payable for the other half, the following changes occur on the balance sheet:

• Assets: Increase due to the acquisition of the land.
• Liabilities: Increase because of the note payable that the company signs for the other half of the payment.
• Owner's Equity: No effect because this transaction doesn't directly affect the owner's equity.

In understanding owner's equity, we can compare this to a scenario where someone owns a property outright, like Freda whose house is valued at $250,000 and owes nothing on it, resulting in equity equal to the home's value. Similarly, Frank who has a house valued at $160,000 with a remaining loan balance of $60,000 has equity of $100,000.