At maturity date, a borrower repays in full the principal of a $2,000 loan and pays $150 interest. Which of the following statements is NOT correct?A.Their assets decrease by $2,150.B.Their bank deposits decrease by $2,150.C.Their debt decreases by $2,150.D.Their equity decreases by $150.E.Their balance sheet shrinks.
Question
At maturity date, a borrower repays in full the principal of a 150 interest. Which of the following statements is NOT correct?A.Their assets decrease by 2,150.C.Their debt decreases by 150.E.Their balance sheet shrinks.
Solution
The statement "Their debt decreases by $2,150." is NOT correct.
When the borrower repays the loan, their debt decreases by the amount of the principal, which is 150 is an expense, not a reduction in debt. Therefore, the total decrease in debt is 2,150.
The other statements are correct. The borrower's assets and bank deposits decrease by 150, which is the amount of the interest payment. And their balance sheet shrinks because both their assets (bank deposits) and liabilities (debt) decrease.
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