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    Accounting equation: Effects of a land sale

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    A parcel of land that was originally purchased for $170,000 is offered for sale at $300,000, is assessed for tax purposes at $190,000, is recognized by its purchasers as easily being worth $280,000, and is sold for $274,000. At the time of the sale, assume that the seller still owed $60,000 to the bank on the land that was purchased for $170,000. Immediately after the sale, the seller paid off the loan to the bank. What is the effect of the sale and the payoff of the loan on the accounting equation, i.e. what are the dollar increases and/or decreases in assets, liabilities, and owners' equity?

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    Solution Preview

    Cost of land of $170,000 is important.

    Offered for sale has no effect in the accounting records.

    The assessment has no effect (although there are times when it can be used to separate structures from land, for example). Not true here.

    Value to the purchasers has no effect.

    Sale price of $274,000 is important.

    The ...

    Solution Summary

    The solution carefully explains the problem including the entries that would be made including a proof of the amounts.