Question

Which Of The Following Properly Describes The Impact On The Financial Statements When A Company Borrows $21,000 From A Local Bank? a.Liabilities Increased $21,000. b.Net Income Decreased $21,000. c.Assets Decreased $21,000. d.Stockholders' Equity Increased $21,000.

Answer 1

The impact on the financial statements when a company borrows $21,000 from a local bank is an increase in liabilities by $21,000. The transaction increases both the company's assets (cash) and liabilities (note payable or long-term debt), but it has no immediate effect on net income or stockholders' equity. The calculation of a bank's net worth follows a similar principle, where net worth equals assets minus liabilities.

Step-by-step explanation:

When a company borrows $21,000 from a local bank, the correct impact on the financial statements is that liabilities increased by $21,000. This transaction is reflected as an increase in the company's cash or bank balance, which is an asset, and an equal increase in its liabilities, particularly under a line item such as 'Notes Payable' or 'Long-term Debt', depending on the loan's terms.

The T-account balance sheet for the bank would be set up as follows, showing the bank's net worth:

• Assets
• Liabilities

The bank's net worth, also known as equity, would then be assets ($620) minus liabilities ($400), which equals $220.

Singleton Bank's balance sheet example shows a similar context where the bank's overall assets have changed, not the net income, equity, or a decrease in assets, reinforcing the impact a loan has on a bank's balance sheet.