On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year 1. Which of the following shows the effect of this event on the financial statements?| Balance Sheet | Income Statement ||------------------------------------------|-----------------------------------------------------|| Assets = Liabilities + Stockholders’ Equity | Revenue – Expense = Net Income | Statement of Cash Flows || A. 2,000 = 2,000 + n/a | n/a – n/a = n/a | 2,000 IA || B. 2,000 = n/a + 2,000 | 2,000 – n/a = 2,000 | 2,000 IA || C. 2,000 = n/a + 2,000 | 2,000 – n/a = 2,000 | 2,000 OA || D. 2,000 = 2,000 + n/a | n/a – n/a = n/a | 2,000 FA |**Multiple Choice Options:**- Option B- Option D- Option A- Option C**Explanation of Financial Statement Effects:**1. **Assets and Liabilities:** - Borrowing $2,000 increases both assets (cash) and liabilities (loan payable).2. **Income Statement:** - Revenue, expense, and net income are not directly affected by the loan borrowing on the date of the transaction.3. **Statement of Cash Flows:** - The $2,000 is recorded as a cash inflow. Depending on the categorization, it could be classified under investing activities (IA), operating activities (OA), or financing activities (FA).**Interpretation:**The most appropriate selection is Option D, which shows an increase in assets and liabilities each by $2,000, with a cash flow effect as a financing activity (FA).

Borrowing is the obligation for the entity which is to be settle in the future and the settlement of which requires the outflow of economic benefits.Choice 2 is correct i.e. option D. Explanation :- Borrowing increase the asset because it increases the cash and on the other hand it also increases the Liabilities as borrowings are classified as liabilities as it is obligation to repay back. Income statement does not affected on the date of borrowing. Borrowing are shows under the financing activities (FA) section of the statement of cash flows. Hence, this choice is correct. Choice 1 is incorrect i.e. option B, because it is not a shareholder's equity and it does not increase the revenue and net income. Also it is not shown under investing activities (IA) section of statement of cash flows. Choice 3 is incorrect i.e. option A, because the borrowings are shown under financing activities (FA) and not under investing activities (IA) in statement of cash flows. Choice 4 is incorrect because i.e. option C, because it is not shareholder's equity, it does not effect the income statement and it also does not shown under operating activities (OA) section of cash flows.