Gain on Sale of Assets

A gain on sale of assets arises when a business sells a long-term asset, such as equipment, a vehicle, land or a building, for more than its book value at the date of sale. Book value, also called carrying amount, is the asset's original cost minus the accumulated depreciation and any impairment recorded against it. The gain is not revenue, because selling equipment is not what the business normally does to earn money; it is a peripheral or incidental gain.

The opposite case, when proceeds are less than book value, is a loss on sale of assets. Both are part of the accounting for the disposal of fixed assets. A gain often signals that depreciation in earlier years was higher than the asset's actual decline in value, or that the market value of the asset has risen, as commonly happens with land.

The calculation compares what the company received with what the asset was carried at:

Here $\text{Net sale proceeds}$ is the cash or fair value of other consideration received, less selling costs such as broker fees, $\text{Cost}$ is the asset's recorded acquisition cost, and $\text{Accumulated depreciation}$ is the depreciation recorded up to the date of sale. Before calculating the gain, the company must record depreciation for the part of the year up to the sale date.

A construction firm bought an excavator for $150,000. By the date of sale it has recorded $105,000 of depreciation, so its book value is $45,000. The firm sells the excavator for $62,000 and pays a $2,000 auction fee, giving net proceeds of $60,000. The gain on sale is $60,000 minus $45,000, which equals $15,000.

• Cash is debited for $60,000.
• Accumulated depreciation is debited for $105,000 to remove it from the books.
• The excavator account is credited for its cost of $150,000.
• Gain on sale of assets is credited for $15,000.

The journal entry balances at $165,000 on each side. Both the asset and its accumulated depreciation have now been removed from the balance sheet.

On the income statement, a gain on sale of assets is usually reported in "other income" or "other gains and losses." Under US GAAP, gains and losses on the sale of property, plant and equipment that is not part of a discontinued operation are reported within income from continuing operations, and many companies show them within operating income, while others place them below it. IFRS (IAS 16) prohibits classifying such gains as revenue. Large gains are often disclosed separately because they are unusual and can flatter a company's results in a single year.

On the statement of cash flows prepared using the indirect method, the gain is subtracted from net income in the operating section, because it is not an operating cash flow. The full $60,000 of proceeds is then shown as an inflow under investing activities. Forgetting this adjustment double-counts the gain and is a common error in exam questions and in practice.

For US tax purposes, the gain is calculated using the asset's tax basis, which often differs from book value because tax depreciation is usually faster. On depreciable personal property such as machinery, the part of the gain that reflects previous tax depreciation is "recaptured" as ordinary income under Internal Revenue Code section 1245, and only any excess over original cost may qualify as a capital gain. Real estate follows different recapture rules. Because the book and tax gains differ, companies may need to adjust their deferred tax liabilities when an asset is sold. Analysts usually exclude one-off gains when assessing underlying profitability, since a company cannot sell the same asset twice.