Question 52

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

When a company purchases equipment through a bank loan, it acquires an asset while simultaneously incurring a liability. This dual impact ensures that the accounting equation remains balanced, as the increase in assets is equal to the increase in liabilities.

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

This option is incorrect because the purchase of equipment does not directly affect the company's net income at the time of acquisition. Net income is influenced by revenues and expenses, not by the acquisition of assets.

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

This is the correct statement, as the transaction results in an increase in equipment (an asset) and a corresponding increase in liabilities due to the bank loan. This maintains the equality of the accounting equation (Assets = Liabilities + Equity).

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

This option is incorrect because taking out a loan does not reduce owners' equity. Instead, it creates a liability which is offset by an increase in assets, leaving equity unaffected at the time of the transaction.

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

This option is incorrect as the purchase of equipment does not immediately affect expenses. Expenses are recorded over time through depreciation, while the initial purchase impacts assets and liabilities directly.

Conclusion

The correct answer, B, accurately reflects the principle that the accounting equation remains balanced when a company takes on a liability to acquire an asset. All other options fail to acknowledge the fundamental relationship between assets and liabilities in maintaining balance within the accounting equation.