Indicate whether each of the following statements is true or false.________ a) An asset source transaction may involve a debit to an asset and a credit to a stockholders' equity account.________ b) An asset use transaction may involve a debit to an asset account and a credit to a liability.________ c) A credit to the Common Stock account would be included in an asset use transaction.________ d) The payment of rent in advance involves a debit to Prepaid Rent and a credit to Cash.________ e) Recognition of Rent Expense (when a cash payment had previously been made in advance) involves a debit to Rent Expense and a credit to Prepaid Rent.
What will be an ideal response?
a) T b) F c) F d) T e) T
a) This is true. An asset source transaction increases an asset, which would be recorded as a debit. This may be accompanied by an increase to stockholders' equity, which would be recorded with a credit. Examples include providing services for cash or on account.
b) This is false. An asset use transaction decreases an asset, which would be recorded as a credit (rather than a debit). This may be accompanied by a debit to a liability, which would decrease the liability. An example includes paying cash to settle accounts payable.
c) This is false. A credit to the Common Stock account would increase it. For example, the issuance of common stock for cash is an asset source transaction (rather than an asset use transaction) that increases Cash and increases Common Stock.
d) This is true. The payment of rent in advance is an asset exchange transaction that increases prepaid rent with a debit and decreases cash with a credit.
e) This is true. Recognition of rent expense, when payment had been made in advance, includes a debit to rent expense (to increase that expense account) and a credit to prepaid rent (to decrease that asset account).
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