Question

In: Accounting

question: Why is retained earnings on December 31, 2018, equal to $80,000 in all three cases...

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

Solutions

Expert Solution

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

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