Question

QUESTION 15 An asset was purchased for $1,000,000 with the down payment of $200,000 and $800,000 on account with the asset vendor. What would be the effect on the total assets and total liabilities in the balance sheet? a. Assets increased by $800,000 and liabilities decreased by $800,000 b. Assets increased by $800,000 and liabilities increased by $800,000 C. Assets decreased by $800,000 and liabilities increased by $800,000 d. Assets increased by $1,000,000 and liabilities increased by 800,000

Answer 1

The correct answer is 'Option b' i.e.,Assets increased by $800000 & liability increased by $800000

Journal entry for the transaction

Date	General Journal	Debit	Credit
	Assets a/c	$1000000
	To Cash a/c		$200000
	To Accounts payable a/c		$800000

From the transaction,
Assets increased by $800000 & liability increased by $800000

On assets side, an asset of $1000000 have been added and cash of $200000 has being flows outside of business

Hence there will be a net effect of increase of $800000 on assets side

Correspondingy, the unpaid amount against asset, being accounts payable, is a liability for business which is an obligation to pay in future . So there will be an increase of $800000 on liabilities side

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