Question

The land that Martin Co. paid $75,000 to purchase in the prior year had an appraised market value of $100,000 at the end of the current reporting period. Which of the following shows how the change in market value will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets = Liabilities + Common Stock + Retained Earnings
A. $75,000 = NA + NA + $75,000
B. $25,000 = NA + NA + $25,000
C. NA = NA + NA + NA
D. $100,000 = NA + NA + $100,000

Answer 1

The correct answer to how the change in market value of land affects Martin Co.'s accounting equation is: C. NA = NA + NA + NA, as the increased market value is not recorded in the accounting equation until the gain is realized.

Step-by-step explanation:

The question involves understanding how a change in the market value of an asset affects a company's accounting equation: Assets = Liabilities + Common Stock + Retained Earnings. In this scenario, Martin Co. purchased land for $75,000, but by the end of the current reporting period, the land's appraised value increased to $100,000.

However, under generally accepted accounting principles (GAAP), an increase in the market value of an asset like land is not typically recorded until the gain is realized through a transaction, such as selling the land. Therefore, the change in market value does not impact the accounting equation until the gain is realized. The correct choice is C. NA = NA + NA + NA, indicating that there is no effect on any component of the equation as a result of the unrealized gain.