Question

Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the fourth year, the equipment is exchanged for new equipment worth $110,000. Terra gets a trade-in allowance of $70,000 on the exchange, with the remaining $40,000 paid in cash. Which of the following is true of the net effect of this transaction? Assume the straight-line depreciation method is used.
A. Assets decrease by $10,000
B. Assets increase by $10,000
C. Liabilities increase by $10,000
D. Total stockholders' equity decreases by $10,000
E. Total stockholders' equity increases by $10,000

Answer 1

Answer:

Assets increase by $10,000

Total stockholders' equity decreases by $10,000

Explanation:

Assets increase =($110,000-$100,000)

Assets increase=$10,000

Total stockholders' equity decreases=$100,000-$110,000

Total stockholders' equity decreases= -$10,000

Therefore Based on the information given what is true of the net effect of the transaction are :

Assets increase by $10,000

Total stockholders' equity decreases by $10,000