A Business Settles a Liability by Making a Payment in Cash

question 7

Multiple Choice

A business settles a liability by making a payment in cash. How does paying this liability affect the accounting equation of the business?

• A)Assets decrease; liabilities decrease.
• B)Liabilities decrease; equity increases.
• C)Assets increase; liabilities increase.
• D)Assets increase; equity decreases.

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Definitions:

Maturity Date

The date on which a financial obligation or investment becomes due for payment or is settled.

Interest Payment

The payment made by a borrower to a lender as compensation for the use of borrowed money.

Four-Month Note

A promissory note or financial instrument that matures or comes due in four months.

Interest Calculation

The process of determining the interest charge on a loan or financial holding, based on the principal, rate, and period.