Purchasing a Building: A Reflective Analysis
What are the implications of purchasing a building for $105,000 by paying cash of $25,000 and signing a note payable for $80,000?
A. Decrease total assets and increase total liabilities by $25,000.
B. Increase both total assets and total liabilities by $105,000.
C. Increase both total assets and total liabilities by $80,000.
D. Decrease both total assets and total liabilities by $25,000.
Answer:
C. Increase both total assets and total liabilities by $80,000.
Reflective Analysis on Purchasing a Building
When purchasing a building for $105,000 by paying $25,000 in cash and signing a note payable for $80,000, it is important to understand the impact on the financial position of the entity. Choosing option C, it shows that both total assets and total liabilities will increase by $80,000.
Before the purchase, the entity had $25,000 in cash, resulting in total assets of $25,000. After the purchase, with the building valued at $105,000 and a notes payable of $80,000, the total assets remain at $25,000. However, there is an increase in both total assets and total liabilities by $80,000.
This transaction highlights the interconnected nature of assets and liabilities in accounting. It is crucial for businesses to carefully consider the financial implications of such purchases to maintain a healthy financial position.