Question

The Noble Corp. installs $75,000 of equipment, paying $25,000 cash and promising to pay the remaining $50,000 in 6 months. What is the impact to this transaction on the accounting equation?

A) Total assets are increased by $50,000.
B) Current assets are increased by $50,000.
C) Total assets are increased by $75,000.
D) Current assets are increased by $75,000.

Answer 1

The impact of the transaction is an increase in current assets by $50,000.

Step-by-step explanation:

The impact of the transaction on the accounting equation is that current assets are increased by $50,000.

Since Noble Corp. installs $75,000 of equipment and pays $25,000 in cash, the initial impact is an increase in the equipment asset account and a decrease in the cash asset account by $25,000 each.

When Noble Corp. promises to pay the remaining $50,000 in 6 months, it incurs a liability, specifically an accounts payable. This accounts payable is categorized as a current liability because it is expected to be paid within one year. Therefore, total current assets increase by $50,000.