Question

On January 1, 2018, Prairie Enterprises purchased a parcel of land for $10,300 cash. At the...

On January 1, 2018, Prairie Enterprises purchased a parcel of land for $10,300 cash. At the time of purchase, the company planned to use the land for a warehouse site. In 2020, Prairie Enterprises changed its plans and sold the land.

Required

  1. Assume that the land was sold for $11,433 in 2020.

  1. (1) Show the effect of the sale on the accounting equation.

  1. (2) What amount would Prairie report on the 2020 income statement related to the sale of the land?

  1. (3) What amount would Prairie report on the 2020 statement of cash flows related to the sale of the land?

  1. Assume that the land was sold for $9,682 in 2020.

  1. (1) Show the effect of the sale on the accounting equation.

  1. (2) What amount would Prairie report on the 2020 income statement related to the sale of the land?

  1. (3) What amount would Prairie report on the 2020 statement of cash flows related to the sale of the land?

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Answer #1

Accounting Equation:

The accounting equation is an equation reflecting the relationship between Equity/Capital, Liabilities and Assets. As the Double entry system of accounting is applied to perform the accounting sum of Equity and liabilities shall always be equal to the sum of assets.

Following are the answers to the above-stated questions. Please give a thumbs up if you find this answer useful!

a. Assume that the land was sold for $11,433 in 2020.

(1) Accounting Equation:

(2) The amount of $1,133 would be reported in Income Statement as the same is Gain on Sale of Land. ($11,433 - $10,300 = Gain of $1,133)

(3) In Cashflow of 2020, Sales of Land will be reflected in Investing activity with Cash inflow of $11,433.

b. Assume that the land was sold for $9,682 in 2020.

(1) Accounting Equation:

(2) The amount of $618 would be reported in Income Statement as the same is Loss on Sale of Land. ($9,682 - $10,300 = Loss of $1,133)

(3) In Cashflow of 2020, Sales of Land will be reflected in Investing activity with Cash inflow of $9,682.

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