Question

Suppose the assets of the Silver Lode Bank are $150,000 higher than on the previous day and its net worth is up $40,000. By how much and in what direction must its liabilities have changed from the day before?

a) Increased by $110,000
b) Decreased by $110,000
c) Increased by $190,000
d) Decreased by $190,000

Answer 1

The liabilities of the Silver Lode Bank must have increased by $110,000 since the assets rose by $150,000 and net worth increased by $40,000.

Step-by-step explanation:

If the assets of the Silver Lode Bank are $150,000 higher than the previous day and its net worth is up by $40,000, then we have to figure out by how much and in what direction the liabilities have changed. The basic accounting equation is Assets = Liabilities + Equity (Net Worth). Since the assets increased by $150,000 and the net worth increased by $40,000, we can determine the change in liabilities by rearranging the equation to Liabilities = Assets - Net Worth. With the changes factored in, the equation shows an increase in liabilities by $110,000, because $150,000 (increase in assets) - $40,000 (increase in net worth) equals $110,000. Therefore, the answer is (a) Increased by $110,000.