On the balance sheet how are the following events recorded? - Owner sold 1/3 of

Question

On the balance sheet how are the following events recorded?

- Owner sold 1/3 of the stock he owned for 11,000 cash? (I understand increase in cash on Assets and increase in ?? Property Appreciation?? on L&O equity side??

- Merchandise costing $1,700 was sold for $2,620, the customers agreeing to pay the $2,620 within 30 days. (No cash received, how do I account for this?? Accounts Recievable or do not place in balance sheet because the cash has not been recieved???)

- Owner learned that the individual who purchased a lot of land subsequently sold it for $14,000. The lot still owned by the owner is identical in value and was purchased for $12,000, a $2,000 increase in value. (Property value increase of $2,000, increase Assets of Property Appreciation value and increase L&O equity side as Goodwill??)

Explanation / Answer

1. Debit: Common Stock, Credit: Cash - Both of these accounts appear on the balance sheet so you will decrease the balance of both by $11,000.

When the owner initially provided cash to finance the company you Debited cash (because he provided cash to the company) and you credited common stock (because he received common stock from the company in return). Since he has sold the common stock you want to decrease the value of the common stock account (with a credit) and also decrease the amount of cash (with a debit) since the company is paying him cash for it.

2. Debit: Accounts Receivable, Credit Sales Revenue - Accounts Receivable appears on the balance sheet, so you will increase the balance of the account by $2,620. Sales Revenue does not appear on the balance sheet, but it is closed into Retained Earnings at the end of the period and Retained Earnings DOES appear on the balance sheet. So you will increase the balance of retained earnings by $2,620.

AND Debit: Cost of Goods Sold, Credit: Inventory - Cost of Goods Sold appears on the income statement but will be closed into retained earnings at the end of the period, and retained earnings appears on the balance sheet. So the retained earnings balance will decrease by $1,700 (because Cost of Goods Sold is like an expense). Inventory appears on the balance sheet so you will just decrease the amount of the inventory account by $1700.

3. This transaction will not be reported on the balance sheet at all (it's a trick question). GAAP requires that land be recorded at the lower of cost or market, so the company is required to keep the value of land at the amount they paid for it, $12,000. They will only recognize the increase in land value when they actually sell it. It will be recorded as a "gain on sale" at that time. However for the time being, no transaction is reported so the balance sheet is unaffected.

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