In: Accounting
If an asset is sold (market value) for more or less than its book value that used for tax purposes, and adjustment must be made to the taxable income during the year. How this difference in market value and book value affect the taxable income?
Ans:
Assets used to be depriciated over time. Assets are capital expenditures which are not allowed to be deducted immidiately when they occur. They get depriciation benifit for tax purposes over the period of time. Book value of assets decrease over the period of time based on depriciation charged to profit and loss account periodically.
However as time passes market value of assets doesn't remain the same as the book value. So whenever a asset is required to be sold. it should realise its market price. Market price of the asset can be less or more than its book value which is depriciated over the period of time. So gain or loss will realise for income tax purposes.
We can understand this with an example:
Suppose an asset is purchased 4 years ago at a price of $10,000, every year depriciated as per applicable rates reduced its book value. Now as on date suppose its book value is $3,000. And we sold this asset for $4,000.
Now tax @$1,000 should be charged becuase we bought asset for $10,000 out of which we have already claimed tax benifit on $7,000 in form of depriciation. So now when asset is sold at $4,000 it is sold over an above its book value by $1,000 which should be taxed becuase that value will othewise should not have provided any benifit if it was not sold.
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