Journal Entry for Sale of Investment Property
Investment property is the real estate that company purchases to rent or resale in the future. The property includes land and building that company acquires to generate a return by renting or resale, which they do not have the intention to use internally.
Investment property is different from fixed assets due to their intended use. The property will be classified as investment property only if the company keeps them for renting and resale. Management invest in these properties for the purpose of generating return rather than internal use.
The investment property includes land, building, and construction in progress that company plan to generate a return from them. By the time company use the property for internal use, these properties should be classified as fixed assets. So the same property can be classified as fixed assets or investment property depending on the intended use.
The company should record the initial cost of investment property based on the acquisition cost including the transportation fee, other unclaimable tax, and other costs that bring assets to be ready for use.
The subsequent measurement of investment property can be defined under cost method or revaluation method. Cost model is the method that company record property at cost and reduce it over time by depreciation expense. The depreciation will depend on the assets’ useful life, company expects that assets will be used up to a certain period of time, so the cost should allocate to expensive depending on the time frame. On the other hand, company can use the revaluation method which requires to access the investment property’s fair value every reporting date. The gain and loss on fair value adjustment will impact the investment property value and income statement.
The journal entry of sale of investment property can be different depending on the subsequent measurement which company use. It impacts the entry and gain/loss calculation.
Journal Entry for Sale of Investment Property
Cost Model
Under cost model, investment property is measured the same as normal fixed assets. It will present as cost less accumulated depreciation which is known as net book value.
When company sells the assets, they need to get rid of both cost and accumulation depreciation. The difference between sale proceeds and net book value is considered as gain or loss from the disposal.
The journal entry is debiting accumulated depreciation, cash received and credit cost, gain (or debit loss) from the disposal.
| Account | Debit | Credit |
| Cash | XXXX | |
| Accumulated Depreciation | XXXX | |
| Cost | XXXX | |
| Gain from Disposal | XXXX |
If the sale proceeds is lower than net book value, it means the company is making a loss. They have to debit loss from disposal instead.
Fair Value Model
Under the fair value method, the investment property changes its value depending on the fair value. The decrease of assets value will generate loss in the same period. On the other hand, the increase of value will make a gain on income statement.
On the sale date, company needs to compare the sale proceed and its carry amount, the difference is gain or loss.
The journal entry is debiting cash and credit investment property, credit gain (debit loss) from disposal.
| Account | Debit | Credit |
| Cash | XXXX | |
| Investment Property | XXXX | |
| Gain from Disposal | XXXX |
Journal Entry for Sale of Investment Property Example
ABC is a trading company. Due to cash surplus, management decide to purchase a plot of land cost $ 100,000 and expect to resale when price increases. The company does not use the land for any purpose. A few years later, they sell the land for $ 150,000 on credit while the carrying value was $ 120,000 due to the value gained in the last period. Please prepare a journal entry for the sale of investment property.
The land that ABC purchase meets the definition of investment property, so they need to separate it from normal fixed assets.
The investment property has increased its value from $ 100,000 to $ 120,000 due to the revaluation model. The latest revaluation is the carrying amount that needs to remove from balance sheet. It was sold for $ 150,000 so the gain on disposal is $ 30,000 ($ 150,000 – $ 120,000).
The journal entry is debiting accounts receivable $ 150,000 and credit investment property $ 120,000, gain from disposal $ 30,000.
| Account | Debit | Credit |
| Accounts Receivable | 150,000 | |
| Investment Property | 120,000 | |
| Gain on disposal | 30,000 |
The transaction removes investment property from the balance sheet after selling for $ 150,000. As the assets carry amount is only $ 120,000, we need to record a gain of $ 30,000.
