What is the effect on the statement of financial position when the business buys a car for $25,000,paying a deposit of $5,000 and promising to pay the balance within 60 days?
A) Increase asset vehicle by $5,000; decrease asset bank by $5,000.
B) Increase asset vehicle by $20,000; increase liability accounts payable by $20,000.
C) Increase asset vehicle by $25,000; decrease asset bank by $5,000; increase liability accounts payable by $20,000.
D) None of the above.

Question

Quizplus · Accepted Answer

The purchase of the car increases the asset "vehicle" by $25,000. However, the company only paid a deposit of $5,000, so the asset "bank" decreases by $5,000. The remaining balance of $20,000 is recorded as a liability "accounts payable" since the promise to pay within 60 days means the company owes this amount to the supplier. Therefore, the correct option is C, which correctly reflects the increase in assets and liabilities resulting from the purchase of the car.

What Is the Effect on the Statement of Financial Position