Land is purchased by the business for $100,000.The company pays for land with a $20,000 cash payment and the execution of an $80,000 promissory note payable to the seller.How does this purchase affect the business's accounting equation?

Question

Quizplus · Accepted Answer

The purchase of land increases assets by $100,000 (the value of the land), not $80,000. However, since $20,000 is paid in cash (reducing assets) and $80,000 is through a promissory note (increasing liabilities), the net effect is an increase in assets by $80,000 (the land's net addition after cash payment) and an increase in liabilities by $80,000 (the promissory note). The explanation mistakenly focuses on the net effect on assets after the cash payment but correctly identifies the increase in liabilities due to the promissory note.

Land Is Purchased by the Business for $100,000