Answer:
(c). Net increase in assets of $35,000 and a net increase in liabilities of $35,000
Explanation:
Accrual basis of accounting attempts to record transactions as and when they arise and not on the basis of when money is actually received or paid. Once a liability is certain, such a liability is provided for immediately.
The journal entry for purchase of Land partly by cash and partly for issuing a notes payable would be:
Land Dr. $55,000
To Cash $20,000
To Notes Payable $35,000
(Being land purchased by payment of $20,000 in cash and a note being issued against the balance amount)
Land and cash are assets whereas Notes Payable is a liability.
So, the effect of the above transaction would be:
Net increase of $35,000 ( $ 55,000 - $ 20,000) as debit in fixed assets account increases their balance whereas cash being a real account, the rule being debit what comes in, credit what goes out. So credit in cash account would reduce the cash balance by $ 20,000.
Notes Payable account which is to be paid in future is a liability which shall increase the liabilities by $ 35,000.
So, the correct answer is (c), Net increase in assets of $35,000 and a net increase in liabilities of $35,000.
