Question

What are the entries into the Accounting equation when an asset is sold for greater than its current book value? If sold for less than current book value? What is the impact on taxes owed in both situations?

Answer 1

Book value of an asset is the cost of acquisition of an asset less the accumulated depreciation of the asset.

If sale proceeds less than book value

Debit cash for the amount received, debit all accumulated depreciation, debit the loss on sale of asset account for the difference between sale amount and book value and credit the fixed asset.

If sale proceeds greater than book value:

Debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account by the amount which the sale proceeds exceeds book value of asset.

Gain on sale of asset is said to be a capital gain which is realized when a capital asset is sold or exchanged at a price higher than its basis.A capital loss occurs when an asset is sold for less than its basis.

Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Short-term capital gains are taxed as ordinary income at rates up to 37 percent; long-term gains are taxed at lower rates, up to 20 percent. Taxpayers with modified adjusted gross income above certain amounts are subject to an additional 3.8 percent net investment income tax (NIIT) on long- and short-term capital gains.

Capital losses are not ideal, but if you've made capital gains on the sale of a different asset that same year, you may be able to use the loss to your advantage.

The subtraction of capital losses from capital gains is known as the net capital gain. That means one can offset the other, whether it's a gain offsetting a loss to make sure you still have a profit or a loss offsetting a gain to help pay less of a capital gains tax that year.