Question 29

The increase in assets is matched by an increase in liabilities.

When a company purchases equipment through a bank loan, it acquires an asset (the equipment) while simultaneously incurring a liability (the loan itself). This transaction keeps the accounting equation balanced as the increase in assets is exactly equal to the increase in liabilities.

A) The company's net income increases by the same amount.

This option is incorrect because taking out a loan to purchase equipment does not directly affect net income at the time of the transaction. Net income is influenced by revenues and expenses, not the act of financing an asset acquisition.

B) The increase in assets is matched by an increase in liabilities.

This option is correct because the transaction involves an increase in assets (the equipment purchased) and a corresponding increase in liabilities (the bank loan taken out). This maintains the balance in the accounting equation, as both sides reflect the same amount.

C) The company's expenses increase, balancing the purchase.

This option is incorrect because the transaction of purchasing equipment does not immediately affect expenses. Expenses related to the equipment would occur over time, through depreciation, rather than at the point of purchase.

D) The loan reduces owners' equity to offset the new asset.

This option is incorrect as well. While taking out a loan does create a liability, it does not reduce owners' equity. Instead, the owners' equity remains unchanged in this transaction, keeping the accounting equation balanced through the increase in both assets and liabilities.

Conclusion

Option B is definitively correct because it accurately describes how the accounting equation remains balanced through the simultaneous increase of assets and liabilities. The other options fail to explain the mechanics of the transaction accurately or misrepresent the effects on net income, expenses, and owners' equity.