The Electric Company buys machinery for $500,000 and gives a promissory note to pay dated 2 years from the purchase date. Interest at 10% and principal are to be repaid at maturity. The life of the asset is also estimated to be two years with no salvage and straight line depreciation is used. We can say that on the purchase date: The liability will be offset from the asset but the total asset amount will increase by the amount of the discount amortization each period. The liability will be offset from the asset until paid so initially the transaction will have no effect on total assets The amount shown for the asset on the balance sheet will be the same as the amount shown for the liability The amount shown for the asset on the balance sheet will differ than the amount shown for the liability None of the other alternatives are correct
The Electric Company buys machinery for $500,000 and gives a promissory note to pay dated 2 years from the purchase date. Interest at 10% and principal are to be repaid at maturity. The life of the asset is also estimated to be two years with no salvage and straight line depreciation is used. We can say that on the purchase date: The liability will be offset from the asset but the total asset amount will increase by the amount of the discount amortization each period. The liability will be offset from the asset until paid so initially the transaction will have no effect on total assets The amount shown for the asset on the balance sheet will be the same as the amount shown for the liability The amount shown for the asset on the balance sheet will differ than the amount shown for the liability None of the other alternatives are correct
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The Electric Company buys machinery for $500,000 and gives a promissory note to pay dated 2 years from the purchase date. Interest at 10% and principal are to be repaid at maturity. The life of the asset is also estimated to be two years with no salvage and straight line
-
The liability will be offset from the asset but the total asset amount will increase by the amount of the discount amortization each period.
-
The liability will be offset from the asset until paid so initially the transaction will have no effect on total assets
-
The amount shown for the asset on the
balance sheet will be the same as the amount shown for the liability -
The amount shown for the asset on the balance sheet will differ than the amount shown for the liability
-
None of the other alternatives are correct
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