Final answer:
The correct entry for the purchase of land with cash is an increase in the land account and a decrease in the cash account, reflecting the cash outlay and asset acquisition. This is an application of the double-entry bookkeeping system used in accounting.
Step-by-step explanation:
The correct statement regarding the purchase of land for $50,000 cash is that it should have been recorded as an increase in land and a decrease in cash. This entry is based on the accounting principles of double-entry bookkeeping, where every transaction affects two accounts. The exchange involves the asset account of land increasing by $50,000 and the asset account of cash decreasing by the same amount, reflecting the outflow of cash to purchase the land.
Statement 2 is correct: The purchase of land should have been recorded as an increase in land and a decrease in cash. This reflects the actual transaction that took place - cash was paid to acquire a physical asset (land). The initial incorrect entry recorded an increase in notes payable, which suggests that the purchase was made on credit, but since the transaction was for cash, this is not the case.
In comparison, as per the additional information given:
- Freda's house transaction would be recorded as an initial cash outflow when purchased and, if sold, as an increase in cash and a capital gain for the difference between the purchase price and the sale price.
- Ben's transaction would initially involve a decrease in cash for the down payment amount and an increase in notes payable for the loan amount. As he pays off the loan, his liability decreases, and his equity in the property increases.