Question

question: Why is retained earnings on December 31, 2018, equal to $80,000 in all three cases despite the reporting of different amounts of net income each year?

Is it A,B, or C?

A: Net income over sufficiently long time periods equals cash inflows minus cash outflows. Walmart acquired the land in 2016 for $100,000 and sold it for $180,000 in 2018. Thus, the total effect on net income through the realization of the increase in the va

B: Net income over sufficiently long time periods equals cash inflows plus cash outflows. Walmart acquired the land in 2016 for $100,000 and sold it for $180,000 in 2018. Thus, the total effect on net income through the realization of the increase in the val

C: Net income over sufficiently long time periods equals cash inflows minus cash outflows. Walmart acquired the land in 2016 for $100,000 and sold it for $180,000 in 2018. Thus, the total effect on net income through the realization of the increase in the va

Answer 1

Net income over sufficiently long time periods equals cash inflows minus cash outflows. Walmart acquired the land in 2016 for $100,000 and sold it for $180,000 in 2018. Thus, the total effect on net income through the realization of the increase in the value of the land bought and sold is $80,000. The three different methods of asset valuation and income measurement recognize this $80,000 in different patterns over time, but the total is the same.

Explanation

b.
	2016		2017		2018
	Dr	Cr	Dr	Cr	Dr	Cr
Cash		100,000			180,000
Land	150,000			30,000		100,000
Gain on land		50,000	30,000			80,000
Loss on land
	150,000	150,000	30,000	30,000	180,000	180,000
c.
	2016		2017		2018
	Dr	Cr	Dr	Cr	Dr	Cr
Cash		100,000			180,000
Land	150,000			30,000		120,000
Gain on sale of land						60,000
Unrealized gain - OCI		50,000	30,000
Unrealized loss - OCI
	150,000	150,000	30,000	30,000	180,000	180,000