A. A vacant lot acquired for $150,000 is sold for $290,000 in cash. What is the effect on the sale on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings) ?

b. Assume the seller owes $80,000 on a loan for the land. After receiving the $290,000 cash in (a), the seller pays the $80,000 owed. What is the effect on the payment on the total amount of the seller's (1) assets, (2) liabilities, and (3) stockholders' equity (retained earnings) ?

Accounting Equation is expressed as:

a. Assets = Liabilities + Equity

When property or land is sold for cash, following journal entry is recorded:

Cash A/c Dr. 290,000

To Land 150,000

To Gain on sale on sale of land 140,000

(Being sale of land for cash recorded)

The effect of the above transaction would be:

Assets would increase by net amount i. e $290,000 - 150,000 i. e by $140,000.

No effect on the liabilities

Retained earnings would increase by $140,000

b. When loan is discharged,

Loan A/C Dr. 80,000

To Cash 80,000

(being discharge of loan recorded)

Following would be the effect:

Assets would increase by net amount i. e $290,000 - 150,000 - 80,000 i. e $60,000

Liabilities would reduce by $ 80,000

Retained earnings would increase by $140,000