Final answer:
A gain on the sale of land is recorded by debiting Cash/Bank with the amount received, crediting Land with the book value, and crediting Gain on Sale of Land with the difference if there's a gain. The gain is the sales proceeds minus the book value of the land.
Step-by-step explanation:
When recording a gain on the sale of land, a business transaction is required. The gain is calculated by subtracting the book value of the land from the sales proceeds. Here’s how you could record the transaction:
- Debit: Cash / Bank (with the amount received from the sale)
- Credit: Land (with the book value of the land)
- Credit: Gain on Sale of Land (with the difference, if the sale price exceeds the book value)
For example, if a farm is sold for $500,000 and its book value is $300,000, the journal entries would be as follows:
- Debit: Cash / Bank for $500,000
- Credit: Land for $300,000
- Credit: Gain on Sale of Land for $200,000
This records both the receipt from the sale and acknowledges the gain realized from the transaction. The necessity of an accurate property title and knowledge of the acreage is crucial in determining fair market value and book value. This can impact the recorded gain or loss.