Question

Peony Corporation acquires a new office building by signing a long-term note. This transaction represents a _________.

1) purchase of an asset
2) sale of an asset
3) payment of a liability
4) receipt of revenue

Answer 1

The correct answer is option 1, a purchase of an asset, as Peony Corporation is acquiring a new office building by signing a long-term note, which increases both assets and liabilities on its balance sheet.

Step-by-step explanation:

When Peony Corporation acquires a new office building by signing a long-term note, this transaction represents a purchase of an asset. A long-term note signifies that the company has entered into a debt agreement to pay for the office building over an extended period, meaning the company now possesses a new asset (the building) and simultaneously incurs a liability (the long-term note payable).

In accounting, the purchase of an asset using debt increases both the assets and liabilities on the balance sheet of the company. This is because the building is added as an asset and the note payable is recorded as a liability. Since Peony Corporation is acquiring, not disposing of an asset, option 2 is not correct. And since they are incurring a liability, not paying it off, option 3 is incorrect. The transaction doesn't represent receipt of revenue either, thus option 4 is also incorrect. Therefore, the correct answer is option 1, a purchase of an asset.