Assume that an old piece of equipment is sold at a loss. From a capital budgeting point of view, what two cash inflows will be associated with the sale?
Accounting/Finance Question?
- Thread starter CoolTech
- Start date
when its bought you pay money and reduce cash for fixed assets,
when you sell it you receive cash and decrease fixed assets in return for cash.
over the period of economic life, it it loses replacement value then you amortise that value against profits, ie ag EBITDA. this reduces the tax as well.
you you 'write off' a computer fully in the first year, as you can in the uk, and then sell it for 200 the next year, you record a loss in the first year of the cost against the accounting profits, and a profit in the second year for what you sold it for and are taxed on that profit.
when you sell it you receive cash and decrease fixed assets in return for cash.
over the period of economic life, it it loses replacement value then you amortise that value against profits, ie ag EBITDA. this reduces the tax as well.
you you 'write off' a computer fully in the first year, as you can in the uk, and then sell it for 200 the next year, you record a loss in the first year of the cost against the accounting profits, and a profit in the second year for what you sold it for and are taxed on that profit.
Michael
Elite member
- Nov 19, 1999
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BSD - Your response was confusing and not really true.
Cooltech - looking for help with your homework? Your question also does not make sense. The only answer that pops into my mind would be the cash that comes in from the sale and maybe some cash from a reduction in taxes due to the loss (depending on the tax carrying value of the equipment, there could be some depreciation recapture here).
Michael
Cooltech - looking for help with your homework? Your question also does not make sense. The only answer that pops into my mind would be the cash that comes in from the sale and maybe some cash from a reduction in taxes due to the loss (depending on the tax carrying value of the equipment, there could be some depreciation recapture here).
Michael
Originally posted by: ddwbi0
ooo oo! i just took a test over this last week!I dont remember though.
That was a quick memory dump
it is accurate, at least for uk accounts, and i assume for us GAAP, so if it isnt why dont you advise me why, and if you just mean some internal book-keeping practice, well you can do whatever you like for that, but audited figures are reached as I advised, at least in the uk, as far as i know.
BrunoPuntzJones
Lifer
- Feb 24, 2001
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It's not like that in the US really. You can't take full depreciation, or "write it off" in the first year unless you elect it as a S 179 expense. S 179s are only availible if you meet certain criteria.
If you are talking about writing off a business loss such as theft, that's different.
You'd just have to make adjustments to cash for what you got, equipment at original cost to get it out, accumulated depreciation (amortization is for non-tangibles like bonds, organizational expenditures, etc. in the US), then see where your numbers line up and make the adjusting entry for gain/loss on sale of equipment.
Other than the cash coming in maybe they are asking about the elimination of the accumulated depreciation on the equipment being a source.
its only a few things you can write off fully in the first year, putehs are 1 - 3 yrs, cars are three or more years, building are 5 to 30 yrs or sth like that. equally you have to write up assets if separate, eg the land of a building may go up while the building needs to be replaced every 30 yrs and also has business value in offices especially in the meantime. you dont book asset wirte ups as realised profit until its an accounting profit on sale, like with selling the written off computer the person got the 200 usd of accounting profit and realised capital gains.
Yeah, it didn't make sense to me either. Why would there be 2 cash inflows? It would just be one, I don't think you could call the reduction in taxes on a loss a cash inflow. Are you sure you posted the question right?
Michael
Elite member
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BSd - Just to let you know, I'm a Chartered Accountant.
- EBITDA is not "profits". Usually profits are defined as net income, not earnings before interest, taxes, depreciation, and amortization. Since depreciation (amoritization of a fixed asset vs. amortization which is typically used to describe the depreciation of intangible asset and of course there is depletion as well ....) is added back to EBITDA, in no way is is deducted from EDITDA.
- It doesn't lose its "replacement value".
- Usually tax amorization and book amortization are completely different (you really keep two sets of books to keep track of tax and book depreciation), so your statement about reducing taxes isn't quite right as well.
Michael
- EBITDA is not "profits". Usually profits are defined as net income, not earnings before interest, taxes, depreciation, and amortization. Since depreciation (amoritization of a fixed asset vs. amortization which is typically used to describe the depreciation of intangible asset and of course there is depletion as well ....) is added back to EBITDA, in no way is is deducted from EDITDA.
- It doesn't lose its "replacement value".
- Usually tax amorization and book amortization are completely different (you really keep two sets of books to keep track of tax and book depreciation), so your statement about reducing taxes isn't quite right as well.
Michael
- EBITDA is not "profits". Usually profits are defined as net income, not earnings before interest, taxes, depreciation, and amortization. Since depreciation (amoritization of a fixed asset vs. amortization which is typically used to describe the depreciation of intangible asset and of course there is depletion as well ....) is added back to EBITDA, in no way is is deducted from EDITDA.
as far as i understood you get ebitda, and remove interes, taxes, dep, and amort., and get the 'net profit' figure- It doesn't lose its "replacement value".
so what does it lose? if i buy a computer for 1500usd today, the same computer can be bought for 500usd in a years time.
- Usually tax amorization and book amortization are completely different (you really keep two sets of books to keep track of tax and book depreciation), so your statement about reducing taxes isn't quite right as well.
not aware of this, in uk as far as i know you are supposed to do the same amount for both internal accounts and audited and filed ones, where the depreciation allowance reflects the depreciating change in economic value of an asset.
incidentally if you had a fitting such as a sculputure that when you sold had a capital gain, would you book that as profit (one off), or as sth else? likewise if a company owns shares which rise and are sold in profit is that booked as one off proifts in the P&L or sth else?
as far as i understood you get ebitda, and remove interes, taxes, dep, and amort., and get the 'net profit' figure- It doesn't lose its "replacement value".
so what does it lose? if i buy a computer for 1500usd today, the same computer can be bought for 500usd in a years time.
- Usually tax amorization and book amortization are completely different (you really keep two sets of books to keep track of tax and book depreciation), so your statement about reducing taxes isn't quite right as well.
not aware of this, in uk as far as i know you are supposed to do the same amount for both internal accounts and audited and filed ones, where the depreciation allowance reflects the depreciating change in economic value of an asset.
incidentally if you had a fitting such as a sculputure that when you sold had a capital gain, would you book that as profit (one off), or as sth else? likewise if a company owns shares which rise and are sold in profit is that booked as one off proifts in the P&L or sth else?
BrunoPuntzJones
Lifer
- Feb 24, 2001
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Yeah in the US you can take different depreciation amounts for different books. Tax wise you may be forced to go by the modified allocated cost recovery system (known as MACRS) which states you take (I'm making these up since I'm too lazy to look it up): 40% the first year, 30% the next, etc until completely depreciated (your rates are dependant on the assest, some are classified as 5 year, 15, 30, etc. there are other methods for tax purposes as well)
Then for your "books" or what the stockholders will see you can use something else. You can use straightline where you just say it cost 5000, it's worth 0 in 5 years. So your depreciation is 1000 a year. Several different methods for what you actually expect it to depreciate by.
The other two you mentioned, stock sales and a sculpture would be considered gains for tax purposes (unless of course the sculpture was donated). They would just go on the front of your tax return as a gain on disposal of property and a gain on sale of investment (granted those may not be the exact right names, but something like that).
Then for your "books" or what the stockholders will see you can use something else. You can use straightline where you just say it cost 5000, it's worth 0 in 5 years. So your depreciation is 1000 a year. Several different methods for what you actually expect it to depreciate by.
The other two you mentioned, stock sales and a sculpture would be considered gains for tax purposes (unless of course the sculpture was donated). They would just go on the front of your tax return as a gain on disposal of property and a gain on sale of investment (granted those may not be the exact right names, but something like that).
so if you normal net profit for the year was 2M usd, and you sold a sculpture for 100k that was bought for 50k then you would get taxed on 2.05M usd, ok I get that, and similarly for share disposals.
What if your company was an investment vehicle and you just wanted to compound its book value, couldnt it avoid paying corporate profits tax until money was actually removed from the business as a dividend?
What if your company was an investment vehicle and you just wanted to compound its book value, couldnt it avoid paying corporate profits tax until money was actually removed from the business as a dividend?
BrunoPuntzJones
Lifer
- Feb 24, 2001
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That's avoided because there is a thing called a PHC here (personal holding company/corporatoin). If your business as seen as delaying such things just to take advantage of tax breaks, you automatically get taxed at the highest possible rate on undistributed earnings.
isnt it possible to set up an investment trust or fund that only gets taxes on paid out profits?
Is this an accounting question or a finance/NPV question? Things get fudged depending on where it's coming from.
EBIDTA is one of the reasons for the creation of the web bubble...and the bursting of it.
EBIDTA is one of the reasons for the creation of the web bubble...and the bursting of it.
BrunoPuntzJones
Lifer
- Feb 24, 2001
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Yeah, I'd have to look it up though. There are all sorts of regulations and tax laws with this stuff. I can't remember it all since I don't work with it every day.
hahaha , he asks a simple question and gets answers about how it works in the UK! i wouldnt want any of you guys as a tutor
Michael
Elite member
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bsd - Ignore EBITDA. It is not defined by GAAP. Basically, it is a proxy for cash flow and is used for analysis of comanies like cable TV firms that have huge depreciation and amortization charges but generate more than enough cash to pay their interest expense plus dividends.
You're wrong about the tax books v. the internal/external or audited accounts. Tax laws in just about every company I can think of allow you to accelerate depreciation on capital expenditures (this is too encourage investment = more jobs). The tax books are not the internal books, they are a completely different set of accounts.
Depreciation reduces the gross book value (purchase price), not the "replacement price". In general, the "replacement value" is moot for most assets. There are times when you have to make a "lower of cost or market" determination, but that doesn't really apply to fixed assets.
ddwbi0 - it wasn't really all that simple a question (I think he wrote it incorrectly). Plus, I'm a Canadian who lives and works in the US, not from the UK.
Michael
You're wrong about the tax books v. the internal/external or audited accounts. Tax laws in just about every company I can think of allow you to accelerate depreciation on capital expenditures (this is too encourage investment = more jobs). The tax books are not the internal books, they are a completely different set of accounts.
Depreciation reduces the gross book value (purchase price), not the "replacement price". In general, the "replacement value" is moot for most assets. There are times when you have to make a "lower of cost or market" determination, but that doesn't really apply to fixed assets.
ddwbi0 - it wasn't really all that simple a question (I think he wrote it incorrectly). Plus, I'm a Canadian who lives and works in the US, not from the UK.
Michael
Zenmervolt
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- Oct 22, 2000
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Debit Cash and credit Loss On Sale.
*This post is by a first year Finance student, so it's not exactly great advice.
ZV
*This post is by a first year Finance student, so it's not exactly great advice.
ZV
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