Question

Which of the following is correct when land costing $19,000 is sold for $21,000 ? The land was a component of property and equipment on the balance sheet.

Multiple Choice
a.Gain on sale of land is credited for $2,000.
b.Revenues are debited for $21,000.
c.Operating Income Increases $21,000.
d.Cost of goods sold Is credited for $19,000

Answer 1

The correct treatment for selling land costing $19,000 for $21,000 is to record a gain on the sale of land, crediting it for $2,000, which reflects the increase in equity from the sale.

Step-by-step explanation:

When a piece of land costing $19,000 is sold for $21,000, the correct accounting treatment is to record a gain on the sale of the land. The correct answer to the question is: a. Gain on sale of land is credited for $2,000. This is because the land is sold for more than its recorded cost, resulting in a gain. The gain is credited to reflect the increase in equity from the sale.

The entry to record this transaction would involve debiting Cash for $21,000 (the amount received), crediting Land for $19,000 (the original cost of the land), and crediting Gain on Sale of Land for $2,000 (the difference between the sale price and the cost).

It's important to note that this gain would not be recorded as Revenues, Cost of Goods Sold, or directly increase Operating Income, as the land is a capital asset and not inventory being sold in the ordinary course of business.