Question

Suppose a bank currently holds 500 in assets. The bank has 50 of owner's equity. If the value of assets increases by 5, what will be the new value of owner's equity?

1) 55
2) 50
3) 45
4) Cannot be determined

Answer 1

The new value of the bank's owner's equity after a $5 increase in assets would be $55, assuming no changes in liabilities. Option 1) is correct.

Step-by-step explanation:

If a bank currently holds $500 in assets with $50 of owner's equity and the value of assets increases by $5, the new value of owner's equity will also increase, assuming no liabilities are affected. To understand this, let's reflect on the basic accounting equation which states that Assets = Liabilities + Owner's Equity.

Accordingly, if the bank's assets increase by $5, from $500 to $505, and there is no change in liabilities, the owner's equity will increase from $50 to $55, as the additional $5 in assets is owned by the equity holders.

Referring to similar examples, if Freda's house value is $250,000 and she owes nothing to the bank, her equity is the entire value of the house, which is $250,000. Similarly, if Frank's house is valued at $160,000 and he owes $60,000 to the bank, his equity stands at $100,000.