Question

Mary took out a loan to buy a $30,000 boat but had $2,000 cash to put down.Which of the following is true?



a.

Mary decreased both assets and liabilities.


b.

Mary increased both assets and liabilities.


c.

Mary decreased assets and increased liabilities.


d.

Mary increased assets and decreased liabilities

Answer 1

The amount of cash she put down is the asset which is decreasing (since the amount of cash in her account goes from $2000 to $0)

The amount of liabilities from her perspective go up. This is because she has to pay back the $28,000 plus interest, taxes and other fees.

Answer 2

Thanks so much!

Answer 3

hmm I'm also thinking that the boat would be an asset as well since Mary can turn around and sell the boat for cash. Now I'm not so sure about the asset column. Let me re-think things.

Answer 4

I'm thinking it's actually B) Mary increased both assets and liabilities

because the boat has value which increases her assets. If she wanted to sell the boat immediately after getting it, she could theoretically sell it for $30,000. Of course, over time, the boat's value will depreciate

of course, her liabilities will definitely increase because she has to pay back the money loaned to her

I looked around and found a similar example here

http://www.accountingcoach.com/blog/accounting-equation

where it says ` For example, if a company borrows $10,000 from its bank, Assets increase by $10,000 and Liabilities increase by $10,000.`