How do I create a journal entry for the sale of a fixed asset (vehicle) with a loan liability paid off by dealership?

Ann-Edward · ‎October 15, 2018

I am having trouble figuring out how to complete the necessary journal entries to record the sale of a fixed asset (vehicle) that's outstanding loan was paid by the dealership, but had negative equity. I understand how to remove the asset/accumulated depreciation accounts, but from there I am lost.

Old vehicle: Original cost $243,70
Accumulated Depreciation $243,70
Loan Balance: $15,259

New vehicle: Cost $31,435 (which includes $2,759 negative equity)
New loan: $31,435

Down Payment (the tricky part for me):
          Old Vehicle Trade in Value: $9500
          Less old vehicle payoff: $15,259
          Equals Net Trade In: -$5759
          Plus Cash Down Payment: $3,000
          leaves $-2,759 which was added to the purchase price of the new vehicle.

So I understand for the sale of the asset, I:

Debit Old Vehicle Accumulated Depreciation: $24,370
Credit Old Vehicle Fixed Asset: $24,370
Credit Gain/Loss on Sale of Asset: $9,500

I believe I am then supposed to create a "current liability account" named "asset sale deposit" to show the $15,259 paid by the dealership to close my old loan, but I do not know to show the Debits and Credits for this entry, or how to close the old loan, show the new vehicle and the new loan,

Greatly appreciate anyone that can walk me through the journal entries in order...

Malcolm Ziman · ‎October 15, 2018

The accounting entry is:

Debit F/A- New Car Cost 28676

Debit Old Loan 15259

Debit Old Car Accumulated Depreciation 24,370

Total Debits 68305

Credit New Loan 31435

Credit Cash 3000

Credit Gain 9500

Credit F/A Old Car Cost 24,370

Total Credits 68305

Whether the 9500 gain is taxable or not is a tax question.

View solution in original post

Malcolm Ziman · ‎October 15, 2018

The accounting entry is:

Debit F/A- New Car Cost 28676

Debit Old Loan 15259

Debit Old Car Accumulated Depreciation 24,370

Total Debits 68305

Credit New Loan 31435

Credit Cash 3000

Credit Gain 9500

Credit F/A Old Car Cost 24,370

Total Credits 68305

Whether the 9500 gain is taxable or not is a tax question.

Ann-Edward · ‎October 15, 2018

Thank you Malcolm! That is the answer I was looking for. I really appreciate you responding to me :)

qbteachmt · ‎October 15, 2018

Without seeing the paperwork, I think this is where you went wrong:

"New vehicle: Cost $31,435 (which includes $2,759 negative equity)" <== No; only Your Cost (basis) goes here

"New loan: $31,435" <== Yes, you are More in debt than the new Vehicle cost, even after your down payment

New car = $28,676 Your Cost?

Like this:

I bought a $5,000 vehicle but am in Debt $7,000, because I essentially refinanced the negative $2k equity

And all of this assumes there is no Step up in basis or "boot" involved; always review this type of activity with your own CPA or tax preparer.

qbteachmt · ‎October 15, 2018

And if there is the boot for basis, I think the 9500 is where there is the error, because that would be net of the negative.

This is why you work with your own CPA on how the tax rules apply to the disposal of assets.

VM2022 · ‎July 29, 2022

I believe you all left out the "Other fees and charges paid by seller on your behalf". Wouldn't this be deducted from the new car cost (value) in additional to the negative equity?

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How do I create a journal entry for the sale of a fixed asset (vehicle) with a loan liability paid off by dealership?