UPS Corporation purchased a truck for $90,000 cash. Which of the following statements is correct immediately after making this purchase?Group of answer choicesNet Income will decrease by $90,000Total Shareholder Equity will decrease by $90,000Total assets will remain the sameTotal liabilities will increase by $90,000
Question
UPS Corporation purchased a truck for 90,000Total Shareholder Equity will decrease by 90,000
Solution
The correct statement immediately after making this purchase is "Total assets will remain the same". Here's why:
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The purchase of the truck is an exchange of one asset (cash) for another asset (truck). So, the total assets of the company remain the same. They have 90,000 more in property, plant, and equipment.
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The purchase of the truck does not affect net income. Net income is affected by revenues and expenses, not asset purchases.
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Total Shareholder Equity will not decrease by $90,000 because the purchase of the truck is not an expense, it's an asset exchange.
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Total liabilities will not increase by $90,000 because the truck was purchased with cash, not on credit. There is no increase in liabilities such as loans or accounts payable.
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