If you’ve already accounted for a leased asset as a fixed asset, you’ve accounted for that asset as a capital lease, sometimes called a finance lease, as opposed to an operating lease. We’ll assume that the capital lease determination is correct and proceed from that point.
Capital leases impact a firm’s balance sheet, and the gain or loss from the disposition of these items flows through to the income statement. However, the gross amount from the sale of fixed assets is not revenue or income and should not be recorded in accounts that record results from operations.
Let’s imagine a company with a computer that had an original cost of $1000 and has accumulated depreciation of $500. The company is selling the computer for $200 and will use the $200 to reduce the lease liability. In effect, the firm has a computer that has a net carrying cost of $500 ($1000 cost less $500 accumulated depreciation) that is being sold for $200, or a loss of $300. Conceptually, here are the journal entries that should be made:
Step 1: Record the Asset Sale
Step 1A: Record the Asset Sale and Use Make Deposits Window to Record the Cash Receipt
Step 2: Record Using the Sale Proceeds to Repay the Lessor
Step 1 removes the computer (the fixed asset) from the balance sheet and reverses the accumulated depreciation against that asset. It also records the cash receipt and the resulting loss. If you elect to enter the cash receipt in the Make Deposits window (Banking->Make Deposits), you would select your computer asset account as the From Account. In that case, since QuickBooks would automatically debit cash for $200 and credit your asset account by $200 (of the $1000 total), you’d make the alternate journal entries in Step 1A to complete recording the asset sale. Note that the “Loss on sale of assets” account is an Other expense account. To create an account of this type, use the Other Account Types selection and choose Other expense from the pull down menu.
The journal entries in Step 2 do not need to be directly entered. Those are the journal entries that QuickBooks will create when a check is written to the lease liability account.