When a business purchases a new asset such as a motor vehicle, it is quite common to trade in or part exchange an old asset to satisfy part of the new asset purchase cost.
Suppose a business trades in an old motor vehicle which originally cost 17,000 and has accumulated depreciation of 11,000, and purchases a new vehicle costing 30,000 in return for cash of 25,000 and a trade in allowance of 5,000 on the old motor vehicle.
Assuming the transaction has commercial substance, first we need to calculate the loss on disposal of the old motor vehicle. Since it was exchanged for fair value of 5,000 and had a net book value of 6,000 (17,000 – 11,000), the loss on disposal must have been 1,000.
Fixed Asset Trade In Journal Entry
The fixed asset trade in transaction is shown in the accounting records with the following bookkeeping entries:
|Loss on disposal||1,000|
Fixed Asset Trade In Bookkeeping Explained
The new motor vehicle (30,000) is brought into the business, and the business makes a loss (1,000) on disposal of the old vehicle.
The old vehicle (17,000-11,000), and the cash (25,000) leave the business and are used to pay for the new motor vehicle.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
|Fixed Assets + Cash||=||None||+||Loss on Disposal|
|24,000 – 25,000||=||0||–||1,000|
In this case the net book value (cost less accumulated depreciation) of the fixed assets increases by 24,000, which is the new vehicle (30,000) less the net book value of the old vehicle (17,000 – 11,000 = 6,000). In addition the asset of cash in reduced by 25,000 as cash is used in part payment of the new vehicle.
On the other side of the accounting equation, the loss on disposal of the old vehicle (1,000) reduces the net income of the business, which decreases the retained earnings and therefore the owners equity in the business.
Note: If the transaction lacked commercial substance only the gain on the cash element of the transaction can be recognized.
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