Question

Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn's assets and liabilities?

A. Increase unchanged
B. Increase Increase
C. unchanged unchanged

Answer 1

Receiving a $20,000 down payment for a luxury sedan increases Washburn Motors' assets due to the increase in cash and does not change liabilities, as a down payment does not create any new obligations for the company. The correct option is A. Increase unchanged.

Step-by-step explanation:

When Washburn Motors receives a $20,000 cash down payment from a buyer for a luxury sedan that costs $100,000, the transaction affects the company's financial statements in a specific way. The company's assets increase by the amount of the down payment because cash, which is an asset, has increased.

The balance on the vehicle, which has yet to be paid, becomes an account receivable, which is also an asset. However, there is no immediate change in liabilities since a down payment does not create a liability; it reduces the receivable asset when the vehicle is delivered later on. Therefore, the most accurate way to describe this transaction is that it results in an increase in assets and no change in liabilities (Option A).