Tax Accounting I

1. Tax Accounting I • Chapter 6/3 The Tax Treatment of Capital Gains Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems

2. 3-The tax treatment of capital gains. • When company stops getting benefits from the fixed asset (land, building, cars, equipment, furniture), it is sold. • Gains are realized when company receives selling price for an asset more than its book value. • Losses are realized when company receives selling price for an asset less than its book value.

3. Note: Book value= Cost of asset – Accumulated depreciation Depreciationis decreasing in the value of the fixed assets due to use them. Depreciation = (cost – salvage value) ÷ useful life Accumulated depreciation is the sum of the annual depreciation.

4. Example • Alex Co., purchased a new machine on January 1, 2010, at a cost $17,000. The company estimated that the machine will have a salvage value of $2,000 at the of its 5- years life. • Required: • Compute the depreciation expense per year. • Compute the accumulated depreciation at the end of 2012. • Compute the book value at the end of 2012. • If Alex Co., sold the machine at the end of 2012 for $10,000, compute the capital gain or loss.

5. Depreciation expense per year =(17,000 – 2,000) ÷ 5-year =$3,000 • Accumulated depreciation at the end of 2012= • The book value at the end of 2012 = cost – Accumulated depreciation • = $17,000 – $9,000 = $8,000 • Capital gain = selling price – book value • = $10,000 – $8,000 = + $2,000 gain.

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