Effect of transactions on accounting equation

Question

a. A vacant lot acquired for $300,500 is sold for $580,000 in cash. What is the effect of the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity? If there is no change, select 'No change' from the dropdown and then enter a "0" in the amount box.

Answer 1

To analyze the effect of the sale of the vacant lot on the accounting equation (Assets = Liabilities + Stockholders' Equity), we can break down the transaction as follows:

1. Assets:

   • The seller's assets will decrease by the cost of the lot ($300,500) when it is sold. However, the cash received from the sale is $580,000.
   • The net effect on assets is: \[ \text{Cash Inflow} - \text{Cost of Lot} = 580,000 - 300,500 = 279,500 \text{ increase in total assets.} \]

2. Liabilities:

   • There is no mention of any liabilities being affected by this transaction. Hence, liabilities remain unchanged.
   • Effect on liabilities: No change → 0

3. Stockholders' Equity:

   • The increase in cash from the sale of the lot will also increase stockholders' equity. The gain on sale of the lot can be calculated as follows: \[ \text{Gain on Sale} = \text{Selling Price} - \text{Cost} = 580,000 - 300,500 = 279,500 \]
   • This gain increases stockholders' equity because it affects retained earnings.
   • Effect on stockholders' equity: Increase by $279,500.

To summarize:

• (1) Assets: Increase by $279,500
• (2) Liabilities: No change → 0
• (3) Stockholders' Equity: Increase by $279,500

Thus, the final answer for liabilities is:

• Liabilities: No change, amount: 0.