Effect of gains and losses on the accounting equation and financial statementsOn January 1, 2013, Liken Enterprises purchased a parcel of land for $20,000 cash. At the time of purchase, the company planned to use the land for future expansion. In 2014, Liken Enterprises changed its plans and sold the land. a. Assume that the land was sold for $22,500 in 2014.1. Show the effect of the sale on the accounting equation.2.What amount would Liken report on the statement of cash flows related to the sale of the land?3.What amount would Liken report on the income statement related to the sale of the land?b. Assume that the land was sold for $18,500 in 2014.1. Show the effect of the sale on the accounting equation.2. What amount would Liken report on the income statement related to the sale of the land?3.What amount would Liken report on the statement of cash flows related to the sale of the land?

Explanation:

Liken enterprises

Accounting equation:

Asset minus Liability = Capital

Jan 1 2013

Land (Asset) was purchased

$20,000 + 0 = $20,000

A.

In 2014

Land (Asset) was sold for cash at a profit of $2,500

*Land (Asset) is now zero

*Cash (Asset) is now $22,500

*Profit from the sale of Land (addition to capital also called retained earnings) is added to capital

Asset minus Liability = Capital

($20,000 - $20,000 + $22,500) minus 0 = $20,000 + $2,500

$22,500 + 0 = $22,500

B.

The statement of cashflow only recognizes cash movement in transactions and not accruals.

Therefore the sale of Land will be recorded as $22,500 in the cashflow statement

C.

Land being an Asset, all of its transactions at the point of purchase and disposal would have been treated within the balance sheet.

However where a profit or loss is arrived at in the disposal of the asset, it is then recognized in the income statement.

In this case $2,500 will be recognized in the income statement as profit on disposal of Land

2.

If land was sold for $18,500 (this is at a loss of $1,500)

A.

*Land (Asset) is now zero

*Cash (Asset) is now $18,500

*Loss from the sale of Land (reduction in capital being net operating loss) is deducted from existing capital balance

Asset minus Liability = Capital

($20,000 - $20,000 + $18,500) minus 0 = $20,000 - $1,500

$18,500 + 0 = $18,500

B.

In this case $1,500 will be recognized in the income statement as Loss on disposal of Land

C.

$18,500 will be recorded in the cashflow statement recognising the cash received from the sale of land at a loss

The effect of the sale on accounting equation:

Dr Cash (Asset + )                                       $22,500

Cr Land (Asset-)                                                            $20,000

Cr Retained earnings(Stockholders' equity+)                $2,500

The amount to be reported in the statement of cash flow for the sale of land is the actual received,$22,500 as a cash inflow under investing activities.

The amount to be recorded in the income statement is gain on the sale of land of $2,500

If the land was sold for $18,500, the following applies:

The effect of the sale on accounting equation:

Dr Cash (Asset + )                                                       $18,500

DR Retained earnings(Stockholders' equity-)              $1,500

Cr Land (Asset-)                                                                             $20,000

The amount to be reported in the statement of cash flow for the sale of land is the actual received,$18,500 as a cash inflow under investing activities.

The amount to be recorded in the income statement is loss on the sale of land of $1,500

Explanation:

The cash account increases,hence a debit was posted in each case.

The land decreases ,it was credited in both cases, while a gain is credited to retained earnings and a loss debited.

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