A company borrows $2 million from its bank. It then uses this money to buy equipment. How does this transaction affect the accounting equation?
A) Assets and Liabilities both rise $2 million.
B) Assets and Stockholders' Equity both fall $2 million.
C) Assets, Liabilities, and Stockholders' Equity are unchanged.
D) Stockholders' Equity rises $2 million and Liabilities fall $2 million.

Question

Quizplus · Accepted Answer

When the company borrows $2 million from its bank, its assets increase by $2 million (due to the equipment purchase), while its liabilities also increase by $2 million (due to the borrowing). This results in a balanced accounting equation where assets (cash + equipment) equal liabilities (bank loan) plus stockholders' equity.

A Company Borrows $2 Million from Its Bank