Assume a company buys a machine worth $1 million and pays for it by borrowing the funds from a bank. The firm's assets will rise by $1 million and its liabilities will also rise by $1 million. Owners' equity will not change. a. true. b. false.

Question

Grant Leblanc

Business

20 February, 00:51

Assume a company buys a machine worth $1 million and pays for it by borrowing the funds from a bank. The firm's assets will rise by $1 million and its liabilities will also rise by $1 million. Owners' equity will not change. a. true. b. false.

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Answers (1)

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Olive Hayden · Answer 1

True

Explanation:

When machine is purchased, then the assets increase by the carrying or purchase value of the machine purchased. Here, it is of $1 million.

Further, when it is purchased as against any credit, it creates a liability with the same amount.

Since here also the liability amount = $1 million, it will be recorded with the same.

As there is no involvement of Equity or Retained earnings this do not lay any impact on carrying value of owners equity.

Thus, it is True.