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 pays $13,000 in cash for merchandise that was previously purchased on credit. What is the effect on the financial statements?
A) Current assets decrease and current liabilities increase.
B) Current liabilities decrease and expenses increases.
C) Current assets decrease and current liabilities decrease.
D) Current liabilities decrease and long-term debt increases.

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 pays $13,000 in cash for merchandise that was previously purchased on credit. What is the effect on the financial statements?
A) Current assets decrease and current liabilities increase.
B) Current liabilities decrease and expenses increases.
C) Current assets decrease and current liabilities decrease.
D) Current liabilities decrease and long-term debt increases.

Quizplus · Accepted Answer

Paying off merchandise previously purchased on credit decreases current assets (cash) and also decreases current liabilities (accounts payable).

Cost of the Asset$100,000