Question

Giff Services Company experienced some difficulties with cash flow so it approached one of its vendors about a payment extension. The vendor agreed to the extension on the condition that the company sign a note that includes 9% interest. What is the impact on the accounting equation of recording a note payable in exchange for the account payable?

A. Both assets and liabilities increase

B. Both assets and liabilities decrease

C. Liabilities increase and stockholders' equity decreases

D. There is no net impact, as there are corresponding increases and decreases in liability accounts.

Answer 1

Giff Services Company experienced some difficulties with cash flow so it approached one of its vendors about a payment extension.

The impact on the accounting equation of recording a note payable in exchange for the account payable:

There is no net impact, as there are corresponding increases and decreases in liability accounts.

Correct option is (D)

In such a case, a current liability (Accounts payable) is being converted into another current liability (Note payable). Thus, total assets, liabilities and stockholders' equity will remain same as before.

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