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 purchases advertising on credit. What is the effect on the financial statements?
A) Expenses decrease and accounts payable increase.
B) Expenses increase and accounts payable decrease.
C) Expenses decrease and accounts payable decrease.
D) Expenses increase and accounts payable 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 purchases advertising on credit. What is the effect on the financial statements?
A) Expenses decrease and accounts payable increase.
B) Expenses increase and accounts payable decrease.
C) Expenses decrease and accounts payable decrease.
D) Expenses increase and accounts payable increase.

Quizplus · Accepted Answer

Purchasing advertising on credit increases expenses (advertising expense) and also increases accounts payable, as the service is received but payment is deferred to a future date.

Cost of the Asset$100,000