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CLEP Financial Accounting Exam Prep

Category - CLEP Financial Accounting Test Practice Questions

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Dilbert’s Doughnuts purchases land and finances that purchase by issuing a long-term bond at par. Dilbert does not have to pay interest for at least 12 months according to the terms. This purchase will lead to which of the following for Dilbert’s accounting?
  1. Decrease in liabilities
  2. Decrease in net income
  3. Increase in assets
  4. Decrease in assets
  5. Increase in net income
Explanation
Answer - C - The purchase of land will result in an increase in assets.

Key Takeaway: Since land is an asset and a long-term bond is a liability, when a company purchases land while issuing a long-term bond, both assets and liabilities increase. Since the company does not have to pay interest on the bond for a year, net income is not affected. Going forward, it will be affected because interest expenses will increase and reduce net income.
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