4) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms

Question

4) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100.

A) gains; loses B) gains; gains C) loses; gains D) loses; loses

5) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

A) the reserves of the First National Bank increase by $ 10.

B) the assets of Citibank fall by $10.
C) the liabilities of the First National Bank increase by $10.

D) the liabilities of Citibank increase by $10.

6) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then

A) the liabilities at Chemical Bank rise by $50. B) the assets of First National rise by $50.
C) the reserves at First National fall by $50.

D) the assets of Chemical Bank rise by $50.

Explanation / Answer

(4) (D)

Deposit by customer is a liability for a bank. So when Jane's check of $100 is cashed, her deposits at bank falls by $100 and bank liabilities decrease by $100. At the same time the cash paid to Jane's nephew decreases bank's cash balance (an asset account) by $100.

(5) (D)

Deposit by customer is a liability for a bank. So when $10 is added to Citibank's customer account, Citibank's liabilities increase by $10.

(6) (C)

Deposit by customer is a liability for a bank. So when $50 is deposited in my First National Bank account, First National's liabilities increase by $50. At the same time when I write $100 check from this account, First National's cash (an asset account) decreases by $50. The net effect is that Reserves (an asset account) of First National decrease by $50 (= $100 - $50).

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