Question

Jorge and Martina have a net worth of $200,000 before any of the following transactions:

A. Paid off credit cards of $10,000 using the money in a savings account.
B. Transferred $4,000 from their checking account to their IRAs.
C. Purchased $2,000 of furniture on credit.
What is the net worth of the Powells after these transactions?

A) $200,000.
B) $186,000.
C) $190,000.
D) $184,000.

Answer 1

Jorge and Martina's net worth after the transactions is $198,000, as paying off the credit card and transferring money to their IRAs had no impact on net worth, while purchasing furniture on credit reduced it by $2,000.

Step-by-step explanation:

The question asks us to calculate Jorge and Martina's net worth after three financial transactions, given their initial net worth is $200,000. To determine their net worth after the transactions, we consider each transaction's effect on their finances.

• Transaction A: Paying off a $10,000 credit card debt with savings does not change net worth. The savings decrease by $10,000, but so does the credit card debt, resulting in a neutral effect.
• Transaction B: Transferring $4,000 from their checking account to their IRAs is a transfer between accounts and does not affect overall net worth.
• Transaction C: Purchasing $2,000 of furniture on credit increases their liabilities, reducing net worth. Thus, their net worth decreases by $2,000.

After these transactions, Jorge and Martina's net worth is their original net worth minus the furniture expense on credit: $200,000 - $2,000 = $198,000.

The correct answer is that the Powells' net worth after the transactions is $198,000.

Answer 2

The Powells' net worth remains at $200,000 after paying off credit card debt with savings and transferring money between accounts. The only transaction that affects their net worth is the furniture purchase on credit, which reduces their net worth by $2,000, leaving the final net worth at $198,000. The correct answer is option A) $200,000.

Step-by-step explanation:

When calculating net worth, any transactions that increase or decrease assets and liabilities need to be accounted for. Jorge and Martina's initial net worth is $200,000. Let's determine the effect of each transaction:

Paying off $10,000 in credit card debt reduces their savings but doesn't change their net worth since it's an asset decrease matched by a liability decrease.

Transferring $4,000 from their checking account to their IRAs is a transfer between accounts, not affecting net worth.

Purchasing $2,000 of furniture on credit increases liabilities without increasing assets, reducing net worth by $2,000.

After considering these transactions, their final net worth is $200,000 - $2,000 = $198,000. By analyzing their financial decisions similar to that of a traditional economist, which suggests treating every dollar equally regardless of where it is ('fungibility'), it's clear that the rational decision to pay debt with savings is because it doesn't change the net worth while it may save on interest costs and future charges.

The correct answer is option A) $200,000.