Multiple Choice
Which of the following costs are included in the capitalized cost of a tangible asset?
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1. Introduction to Accounting
Fundamental Accounting Equation
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When a company purchases office equipment on account, what is the impact on the fundamental accounting equation?
A
Assets increase; Liabilities increase; Equity remains unchanged.
B
Assets decrease; Liabilities decrease; Equity remains unchanged.
C
Assets increase; Equity increases; Liabilities remain unchanged.
D
Assets remain unchanged; Liabilities increase; Equity decreases.
Verified step by step guidance1
Step 1: Begin by recalling the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.
Step 2: Analyze the transaction described in the problem. The company is purchasing office equipment, which is an asset, and it is doing so on account, meaning it is creating a liability (accounts payable).
Step 3: Determine the impact on each component of the accounting equation. Since office equipment is an asset, the 'Assets' category will increase. Because the purchase is made on account, the 'Liabilities' category will also increase.
Step 4: Consider the 'Equity' component. In this transaction, there is no direct impact on equity because the purchase does not involve revenue, expenses, or owner contributions/withdrawals.
Step 5: Conclude that the correct impact on the fundamental accounting equation is: Assets increase; Liabilities increase; Equity remains unchanged.
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