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a) A vacant lot acquired for $115,000 is sold for $298,000 in cash
a) A vacant lot acquired for $115,000 is sold for $298,000 in cash. What is the effect of the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) owner's equity?
b. Assume that the seller owes $80,000 on a loan for the land. After receiving the $298,000 cash in (a), the seller pays the $80,000 owed. What is the effect of the payment on the total amount of the seller's (1) assets, (2) liabilities, and (3) owner's equity?
c. Is it true that a transaction always affects at least two elements (Assets, Liabilities, or Owner's Equity) of the accounting equation? Explain.
Expert Solution
| Assets | Liabilities | Owner's Equity | |
|---|---|---|---|
| a. | $183,000 | $183,000 | |
| b. | (80,000) | (80,000) |
Journal Entry:
| Accounts | Debit | Credit | |
|---|---|---|---|
| a. | Cash | 298,000 | |
| Equipment | 115,000 | ||
| Gain on Sale of Equipment | 183,000 |
Cash and Equipment accounts are asset accounts which increases in the debit and decreases in the credit These will result to a net increase in asset of $183,00. The gain on sale of equipment is presented under income statement which will be closed to the owner's equity at the end of the period.
| Accounts | Debit | Credit | |
|---|---|---|---|
| b | Loans Payable | 80,000 | |
| Cash | 80,000 |
These will decrease the cash account under Assets because of the cash outflow of cash and decreases the loans payable under liabilities due to its settlement.
c. The statement is false, there are transactions that leads to an increase in asset but will also decrease the asset. What is true is that transactions always affects at least two accounts.
Example of transaction that increases assets but also decreases assets is the collection of accounts receivable. Collection of accounts receivable increases cash due to the cash inflow but decreases accounts receivable due to the settlement of customers. Both Cash and Accounts Receivable are asset account.
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