Cost of the asset$100,000
Life of the asset 5 years
Depreciation rate20%
Capital cost allowance rate 50%
Residual value of the asset nil
Income tax rate 50%
-An entrepreneur borrows $50,000 from the bank for his business, to be repaid in one year. What is the effect on the financial statements?
A) Current assets increase and shareholder's equity increase.
B) Current assets decrease and current liabilities increase.
C) Current assets increase and current liabilities increase.
D) Current assets increase and long-term liabilities increase.

Question

Cost of the asset$100,000 
Life of the asset 5 years 
Depreciation rate20% 
Capital cost allowance rate 50% 
Residual value of the asset nil 
Income tax rate 50%
-An entrepreneur borrows $50,000 from the bank for his business, to be repaid in one year. What is the effect on the financial statements?
A) Current assets increase and shareholder's equity increase.
B) Current assets decrease and current liabilities increase.
C) Current assets increase and current liabilities increase.
D) Current assets increase and long-term liabilities increase.

Quizplus · Accepted Answer

Borrowing $50,000 increases current assets (cash) and also increases current liabilities (the loan that must be repaid within a year).

Cost of the Asset$100,000