ACCOUNTING - How to show equipment trade-in ??

Question

You have an old machine that you are going to trade-in on a new machine to do the same work. The old machine cost $145,000 and had $125,000 of accumulated depreciation. The new machine costs $185,000. You have arranged a deal with the person selling the new machine to take your old machine and $155,000 cash for the new machine. Show the Journal Entry you will make to record the transaction for Financial Accounting purposes.

Answer 1

I dont have the journal entries but you treat the trade in just as a sale of an item if i'm not mistaken -- in other words when you trade it in the seller of the new equipment assigns a value to the trade in and that is your sale on the used item.  So 185 - 155 is the 'salvage' or actual cash received for the trade in, the new item is recorded at 185 historical asset value the loan is 155 etc, etc. I'm sorry I cannot do the journal entry though.

Answer 2

The normal accounting entries are as follows:

For old equipment:
1) Debit Accumulated Depreciation - $125,000
     Credit Disposal of fixed assets - $125,000
2) Debit Disposal of fixed assets - $145,000
     Credit Equipment - $145,000

For new equipment:
3) Debit Equipment - $185,000
     Credit bank - $155,000
     Credit Disposal of fixed assets - $30,000

So, balance in your equipment cost is $185,000
       balance in your accumulated depreciation is 0
       balance in your disposal of fixed assets is $10,000 Credit

Regards

Bobby Tan

Answer 3

A more conservative method of accounting for this would be to just treat this as an equipment swap and defer the $10k gain until the $185k piece of equipment is sold or disposed of later on. You will then be able to cushion any loss or boost your gain later on on disposal.

Yeah the equipment retails at $185k, but that's not what was paid. I can't remember a situation in all the accounting classes I took where a gain on purchase of equipment was recognized.

Entry:

Dr : Equipment  $175,000
Dr:  Accum Depr  $125,000
Cr. Cash  $155,000
Dr. Equipment $145,000