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20 December, 12:38

A. A vacant lot acquired for $150,000 is sold for $290,000 in cash. What is the effect on the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings) ?

b. Assume the seller owes $80,000 on a loan for the land. After receiving the $290,000 cash in (a), the seller pays the $80,000 owed. What is the effect on the payment on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings) ?

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  1. 20 December, 12:47
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    Accounting Equation is expressed as:

    a. Assets = Liabilities + Equity

    When property or land is sold for cash, following journal entry is recorded:

    Cash A/c Dr. 290,000

    To Land 150,000

    To Gain on sale on sale of land 140,000

    (Being sale of land for cash recorded)

    The effect of the above transaction would be:

    Assets would increase by net amount i. e $290,000 - 150,000 i. e by $140,000.

    No effect on the liabilities

    Retained earnings would increase by $140,000

    b. When loan is discharged,

    Loan A/C Dr. 80,000

    To Cash 80,000

    (being discharge of loan recorded)

    Following would be the effect:

    Assets would increase by net amount i. e $290,000 - 150,000 - 80,000 i. e $60,000

    Liabilities would reduce by $ 80,000

    Retained earnings would increase by $140,000
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