Question

On January 1, Year 1, Prairie Enterprises purchased a parcel of land for $11,500 cash. At the time of purchase, the company planned to use the land for a warehouse site. In Year 3, Prairie Enterprises changed its plans and sold the land. Required a. Assume that the land was sold for $12,765 in Year 3. (1) Show the effect of the sale on the accounting equation. (2) What amount would Prairie report on the Year 3 income statement related to the sale of the land? (3) What amount would Prairie report on the Year 3 statement of cash flows related to the sale of the land? b. Assume that the land was sold for $10,810 in Year 3. (1) Show the effect of the sale on the accounting equation. (2) What amount would Prairie report on the Yeap 3 income statement related to the sale of the land? (3) What amount would Prairie report on the Yeat 3 statement of cash flows related to the sale of the land?

Answer 1

a)

Cost price of land = $11,500

Sale price of land = $12,765

Gain on sale of land = Sale price of land - Cost price of land

= 12,765 - 11,500

= $1,265

1)

Year 3 Accounting equation

Assets		=	Stockholders' equity
Cash	Land	=	Common stock	+	Retained earnings
12,765	- 11,500				1,265

2)

Gain of $1,265 will be reported in the income statement

3)

Cash inflow from investing activities = $12,765

b)

Cost price of land = $11,500

Sale price of land = $10,810

Loss on sale of land = Cost price of land - Sale price of land

= 11,500 - 10,810

= $690

1)

Year 3 Accounting equation

Assets		=	Stockholders' equity
Cash	Land	=	Common stock	+	Retained earnings
10,810	- 11,500				- 690

2)

Loss of $690 will be reported in the income statement

3)

Cash inflow from investing activities = $10,810

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