Accounting question regarding A=L+E?

Question

A company buys a piece of land for $1,000,000. It puts down $200,000 in cash, and gets a $800,000 mortgage. The loan (0% interest) will be paid off in 8 years (8 even payments). At the end of the 8 years, the land will be worth $2,000,000 (it appreciates at $125,000 per year). What does the A=L+E formula look like in years 1, 2, & 10?

Answer 1

year 1: 1,000,000 = 800,000 + 200,000
Year 2: 1,125,000 = 675,000 + 450,000
Year 10: 2,125,000 = 0 + 2,125,000

Each year 125,000 is put into asset revaluation reserve (equity) and 125,000 comes in from outside parties to pay off the loan (also equity). Hence equity increases by $250,000 each year, the loan decreases by $125k each year and land inc by 125k each year

I think this is right

Answer 2

Well, the formula stays the same throughout, but the account balances in the asset and liability accounts will change.

You need to remember that basis is considered to be historic cost, so that will remain constant. The increase in value is considered fair market value and will not need to be increased per the books. Now, if the land is improved by landscaping, that will become a capital improvement and will increase the book value of it.

So for the first year of the purchase, you'll debit the land account for the entire $1,000,000. Cash gets credited for the down payment, and the liability account is credited for the $800,000 on the mortgage.

For years 2 - 10, cash is credited for each note paid, and the liability is debited for the same amount.

If the property is sold, that's when the FMV comes into the picture and will be considered in the asking price. Should there be a casualty involving the value of the land, the FMV will be used.

Answer 3

Year 1=1,125,000=700,000+425,000
Year 2=1,250,000=600,000+650,000
Year 10=2,250,000=0+2,250,000