Question

Sensa Corporation incurred operating expenses amounting to $140,000 of which $85,000 was paid in cash; the balance will be paid during 2015. Which of the following is correct for the 2014 year-end balance sheet
Assets decrease $170,000 and stockholders' equity decreases $170,000
Stockholders' equity decreases $75.000 and assets decrease $75,000.
Stockholders' equity decreases $170,000, assets decrease $75,000, and liabilities increase S95000
Assets decrease $170.000, liabilties increase $95,000, and stockholders' equity decreases $170,000

Answer 1

Answer:

Assets decrease $85,000, liability increase $55,000, stockholders' equity decreases $140,000

Explanation:

The accounting equation shows the relationship between the elements of a balance sheet which are assets liabilities and equity. This may be expressed mathematically as

Assets = Liabilities + Equity

While assets include fixed assets, cash, inventories, account receivables etc, liabilities include accounts payable, loans payable, accrued expenses etc.

Expenses and sales determine the net profit/loss which is a part of owners equity.

When the corporation incurred operating expenses amounting to $140,000 of which $85,000 was paid in cash, the entries posted would have been

Debit Operating expense $140,000 (decrease in equity)

Credit cash account $85,000 (decrease in assets)

Credit Accounts Payable $55,000 (Increase in liability)

Answer 2

Answer:  Based on the facts presented in the question, none of the options is correct. Please see the correct answer below:

Assets decrease $85,000, liabilities increase $55,000, and stockholders' equity decreases $140,000

Explanation: The following journal entries would be recorded during the year:

Debit Operating expenses             $140,000

Credit Cash                                       $85,000

Credit Accounts payable                 $55,000

(To record the operating expenses incurred during the year)

• The operating expenses amount of $140,000 impacts stockholders' equity, by decreasing the net income.
• The credit to cash decreases asset
• While the credit to accounts payable increases liabilities