Question

The Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, The Austin Land Company paid off the loan. Explain the effect of the sale and the payoff of the loan on the accounting equation. Enter all dollar amounts as positive numbers.

Answer 1

Answer:

The sale implies:

Reduction in asset-land by $65000

An increase in asset cash by $85000

An increase share capital by $20,000

The payment of mortgage means:

decrease in liability by $40,000

decrease in asset by $40,000

Explanation:

First of all, the sale of the land means a decrease in a non-current asset, land by $65,000 as well as an increase in a current asset cash by $85,000 while balancing amount of $20,000, gain on sale of land would increase  retained earnings and ultimately share capital equity.

The payoff of loan of $40,000 reduces long-term liability mortgage by $40,000 and also reduces current asset , cash by the same amount, in other words asset and liability reduce by $40,000 simultaneously.