Question

Sharon, the general manager of a 50-room motel, prepays one month's mortgage payment. What is the effect of this transaction on the fundamental accounting equation?

1) Assets decrease, liabilities decrease, and owners' equity remains the same.
2) Assets, liabilities, and owners' equity all remain the same.
3) Assets remain the same, liabilities increase, and owners' equity decreases.
4) Assets remain the same, liabilities increase, and owners' equity increases.

Answer 1

Prepaying one month's mortgage payment at a motel results in assets remaining the same, liabilities decreasing, and owners' equity increasing.

Step-by-step explanation:

The effect of Sharon, the general manager of a 50-room motel, prepaying one month's mortgage payment on the fundamental accounting equation is that assets remain the same, liabilities decrease, and owners' equity increases.

Assets refer to the resources owned by the motel, which include items like the building, furniture, and cash. Prepaying the mortgage payment does not affect the motel's assets as there is no change to these resources.

Liabilities represent the debts owed by the motel, such as mortgages, loans, and payables. Prepaying the mortgage payment reduces the amount of debt owed, resulting in a decrease in liabilities.

Owners' equity refers to the portion of the motel's assets that belongs to the owner(s). When one month's mortgage payment is prepaid, it increases the owner's equity because it represents an investment by the owner(s) into the business, adding value to their ownership stake.