Monday, May 26, 2008

Purchasing on Credit Partial Payments

A Shipping Company purchases a machine for $28,000 on credit, and a month later makes a partial payment of $23,000 for the machine. The overall result of the 2 transactions combined will cause:

A. Total Liabilities to increase by $5,000
B. Total Assets to decrease by $23,000
C. Total Assets to decrease by $5,000
D. Total Liabilities to decrease by $5,000
E. Total Assets to remain unchanged

Answer: A

Explanation to Solution:

28000 on credit implies a Liability

23000 of 28000 is paid , yet the company still has an outstanding liabilities balance of 28000-23000 = 5000.

This is because the partial payment of 23000 decreases the asset (cash) by 23000, remember the question asked for the 'overall result' of the 2 transactions. You must remember that cash is not the only form of Asset. For example, if you buy office equipment with cash, you are trading one asset for another type of asset.

1 comment:

Anonymous said...

hi, can you clarify why liabilities increase by $5000.

Liabilities was already 28K from purchasing on credit, and so I would have thought the best answer would be that liabilities decreased by 23,000.
Since that isn't an option, then i would have picked E, since the value of assets remain the same after both transactions.

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