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Purchase of machinery for cash:Question 11Answera.Increases total assetsb.Keeps total assets unchangedc.Decreases total assetsd.Increases assets and liabilities

Question

Purchase of machinery for cash:Question 11Answera.Increases total assetsb.Keeps total assets unchangedc.Decreases total assetsd.Increases assets and liabilities

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Solution

The correct answer is b. Keeps total assets unchanged.

Here's the step by step explanation:

  1. When a company purchases machinery for cash, it is essentially converting one type of asset (cash) into another type of asset (machinery).

  2. The cash account in the company's balance sheet will decrease by the amount spent on the machinery.

  3. Simultaneously, the machinery account (under property, plant, and equipment) will increase by the same amount.

  4. Therefore, the total assets of the company remain unchanged because the decrease in cash is offset by the increase in machinery.

  5. This transaction does not affect liabilities at all, so options a and d can be ruled out.

  6. Since the total assets remain the same, option c can also be ruled out.

So, the correct answer is b. Keeps total assets unchanged.

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