Question

Deer Park Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?

1) Assets
2) Liabilities
3) Owners' equity
4) Cash

Answer 1

The owners' equity remains unaffected when Deer Park Corporation borrows $70,000 cash from a bank, as only assets and liabilities are affected. Bonds and bank loans are both debt financing methods but differ in how the funds are sourced and in legal and repayment terms. For Eva's home equity calculation, her equity would be the down payment of $20,000.

Step-by-step explanation:

The Deer Park Corporation transaction of borrowing $70,000 cash from its bank will affect several components of the company's financial statements. When the company borrows money, its assets increase because it now has more cash on hand. However, to balance this increase on the asset side of the balance sheet, the company's liabilities also increase because it has an obligation to repay the bank loan. The component that remains unaffected by this transaction is the owners' equity, as it does not change directly as a result of borrowing the money. The owners have not invested additional funds, nor have they recouped any investments; therefore, the owners' equity remains the same until earnings are generated or other ownership transactions occur.

Taking a broader look, it's worth noting that from a firm's perspective, bonds are similar to bank loans in that they both represent a form of borrowing and require the firm to make future repayments with interest. However, they differ in terms of the source of funds, legal structure, repayment terms, and potential impact on management. A bond issues through public markets typically involves many investors and has strict regulatory requirements, while a bank loan is usually negotiated with a single lender.

Regarding the home equity calculation for an individual who just bought a house: If someone named Eva bought a house for $200,000 with a 10% down payment, Eva's initial equity in the home is the amount of the down payment, which in this case would be $20,000. This is because home equity is calculated as the current market value of the home minus any outstanding loan balances on that property.