Question

The following information pertains to the next two questions. Company A paid $30,000 cash to buy land from Company B.

9.        Select the statement that is true.

a.        Total liabilities of Company B would increase.

b.        Total assets of Company A would be unaffected.

c.        Company A's equity would increase.

d.        None of the above.

10.      Select the statement that is true.

a.        Company A would have a cash outflow from investing activities.

b.        Company B would have a cash inflow from investing activities.

c.        The balance in the cash account on Company A's books would decrease, while the balance in the cash account on Company B’s books would increase.

d.        All of the above statements are true.

Answer 1

When company A purchased land from Company B and paid cash of 30,000 then the entries in company A and company B will be:

Company A				Company B
Land	30,000			Cash	30,000
Cash		30,000		Land		30,000

Solution 9:

Statement that is true is b. Total assets of Company A would be unaffected as Land and Cash both are asset account and one account is increased and the other is decreased so Total assets would be unaffected.

Statement a. is not true as by selling land there will be no effect on liabilities so the Total liabilities of Company B would neither increase nor decrease.

Statement c. is not true as there will be no effect on equity because of this transaction.

Statement d. is not true as statement b. is true.

Solution 10:

Statement that is true is d. as all the 3 statements a,b and c is true.

Company A would have a cash outflow of 30,000 from investing activities.

Company B would have a cash inflow of 30,000 from investing activities.

The balance in the cash account on Company A's books would decrease by 30,000, while the balance in the cash account on Company B’s books would increase by 30,000.