Expert: Arthur Naman - 4/23/2009

Question
We traded in an owned vehicle and then leased a new vehicle.  The dealership paid off the remaining balance on the loan of the orignal vehicle and raised our lease rate to cover that cost.  In doing the journal entry for the sale of the original vehicle there is a "loss on sale of vehicle" of $7,000 (credit fixed asset for original purchase amount $34,000, debit accumulated depreciation $12,000, debit liability for loan payoff $15,000, balance is a debit of $7,000).  Can we take a loss for this or do we have to put this amount in a prepaid lease account and amortize it over the lease period?

Answer
I do not think this is a tax-free transaction. Even though your new lease payments, in effect, "pay" off the old loan I think that the lease and the sale of the old car are separate.

Thus I believe you have a loss on the sale of the old car to recognize.