Effect of gains and losses on the accounting equation and financial statementsOn January 1, 2013, Liken Enterprises purchased a parcel of land for $20,000 cash. At the time of purchase, the company planned to use the land for future expansion. In 2014, Liken Enterprises changed its plans and sold the land. a. Assume that the land was sold for $22,500 in 2014.1. Show the effect of the sale on the accounting equation. 2. What amount would Liken report on the statement of cash flows related to the sale of the land?3. What amount would Liken report on the income statement related to the sale of the land? b. Assume that the land was sold for $18,500 in 2014.1. Show the effect of the sale on the accounting equation. 2. What amount would Liken report on the income statement related to the sale of the land?3. What amount would Liken report on the statement of cash flows related to the sale of the land?

The effect of the sale on accounting equation:

Dr Cash (Asset + ) $22,500

Cr Land (Asset-) $20,000

Cr Retained earnings (Stockholders' equity+) $2,500

The amount to be reported in the statement of cash flow for the sale of land is the actual received,$22,500 as a cash inflow under investing activities.

The amount to be recorded in the income statement is gain on the sale of land of $2,500

If the land was sold for $18,500, the following applies:

The effect of the sale on accounting equation:

Dr Cash (Asset + ) $18,500

DR Retained earnings (Stockholders' equity-) $1,500

Cr Land (Asset-) $20,000

The amount to be reported in the statement of cash flow for the sale of land is the actual received,$18,500 as a cash inflow under investing activities.

The amount to be recorded in the income statement is loss on the sale of land of $1,500

Explanation:

The cash account increases, hence a debit was posted in each case.

The land decreases, it was credited in both cases, while a gain is credited to retained earnings and a loss debited.