How to create an asset with a reduced value compared to my regular currency (dollars)

[Adrien Monteleone]

Michael,

I don’t regularly deal with loan entries, and each jurisdiction is different, but in the U.S., loan forgiveness (the technical term I believe is 'discharge of indebtedness') is often considered a source of income and is generally taxable. That 10% annual forgiveness would likely have to be booked against income.(note the qualifications of ‘often’, ‘generally’, ‘likely’ — your mileage may vary)

As for an art purchase with potential capital gain or loss, there’s no entry required if you find out the artist was different. You book what you actually paid at the buy and you book what you actually received on the sale. The difference is either a gain or loss. ‘Expected' gain or loss is mostly for your own curiosity and probably should not be reflected in financial books. The value of an asset in financial books is never what it ‘might’ or ‘should’ be worth. The asset is only *actually* worth what was paid for it.

An adjusted asset value is going to happen for a particular reason. Either it is a correction of an erroneous initial value where a simple correcting entry solves the problem, or it is a specified write-down such as depreciation which is balanced by an expense. (essentially a ‘use’ transaction of a pre-paid expense) You don’t generally realize an increase in an asset value short of a correcting entry until and unless the asset is sold. (This is why special trading accounts are used to track present value of securities separately without actually adjusting the underlying asset value.)

Anything else would be a shift from one asset to another.

As for liability changes, again, these are either correcting entries to fix errors, shifts to other liabilities (a credit card balance transfer for example) or income. (debt you no longer owe and don’t have to pay)

The question of if those events are taxable or not depends on your local taxing jurisdiction and specific circumstances should be answered with the guidance of a CPA.

And I’m no CPA either, just passing along what I’ve learned in school and having to find these answers for myself over the years.

Regards,
Adrien

> On Dec 8, 2017, at 9:23 AM, Mike or Penny Novack <stepbystepfarm at dialup4less.com> wrote:
> 
> On 12/7/2017 5:53 PM, David Carlson wrote:
>> Adrian,
>> 
>> While I am not an accountant, historically I have used a method similar to
>> that suggested by Adrien.  However, I am intrigued by the answer provided
>> by Michael Novack, as it avoids the problem of overstating potentially
>> taxable income without needing to have a group of accounts to segregate
>> before running your tax reports at the end of the year.
>> 
>> Thus I am considering switching to a method modeled on his suggestion.
>> 
>> David C
>> 
> There are other situations which might call for the adjustment of an asset value (or liability amount) that should not be considered either income or expense. I suggest looking in accounting texts with the topic probably under "journal entries". Some examples:
> 
> a) Back in the 60's I went to school with the help of NDF loans. There might be something similar today. They had a condition on the liability amount. Could treat these are ordinary loans BUT every year you taught forgave 10% of the loan.
> 
> b) When you opened your books, one of the major asset categories was art work. Yes, if you sold a picture for a greater amount than its book value, a capital gain (or for less, a capital loss). But suppose instead a picture thought to be by artist A was later discovered to have been by artist B (with VERY different values).
> 
> I am NOT an accountant. But I think these would be handled by "journal entry" adjustments with equity being the other side of the transaction.
> 
> Michael
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