Your company bought a 30-second advertisement that aired during the Stanley Cup finals at a cost of $1.2 million.It is legally obligated to pay for the ad but has not yet done so.How does the purchase and use of the ad time affect your company's balance sheet?
A)It increases both assets and liabilities by $1.2 million.
B)It increases assets and decreases Shareholders' equity by $1.2 million each.
C)It does not affect the balance sheet.
D)It increases liabilities and decreases Shareholders' equity by $1.2 million each.

Question

Quizplus · Accepted Answer

The purchase of the ad time represents a liability to the company because it has not yet been paid for. Therefore, the liability account would increase by $1.2 million. At the same time, the company's Shareholders' equity would decrease by $1.2 million as the funds would be earmarked for the payment of the ad. There is no impact on assets since the purchase is a liability until paid.

Your Company Bought a 30-Second Advertisement That Aired During the Stanley