If the factory investment is financed using debt, what is the likely impact on the balance sheet?

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Multiple Choice

If the factory investment is financed using debt, what is the likely impact on the balance sheet?

Explanation:
When you buy a factory with borrowed funds, you acquire a new long-term asset and you incur a loan. The factory increases the non-current assets on the balance sheet, and the loan increases liabilities (typically a non-current liability if the debt is long-term). Equity isn’t directly affected by debt financing, so it stays the same. Therefore the immediate effect is higher non-current assets and higher liabilities, which is why that option is the best fit.

When you buy a factory with borrowed funds, you acquire a new long-term asset and you incur a loan. The factory increases the non-current assets on the balance sheet, and the loan increases liabilities (typically a non-current liability if the debt is long-term). Equity isn’t directly affected by debt financing, so it stays the same. Therefore the immediate effect is higher non-current assets and higher liabilities, which is why that option is the best fit.

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