[anbibr]

purchass a car with a traid-in
new car -$20000
trade in cost $16000
dep $4600/year for 3years
allowance for traid in -3000
book value $13800

how to credit and debit

[rehmanvohra]

purchass a car with a traid-in
new car -$20000
trade in cost $16000
dep $4600/year for 3years
allowance for traid in -3000
book value $13800

how to credit and debit

I think there is something wrong with the question. You say that the book value is $13,800. I think it is the depreciable cost (4,600 x 3) = 13,800. Since the trade in value is $3,000 which is closer to the residual value of $2,200, the entries will be:

First close the account of the old car:
Debit Disposal 2,200
Debit Acc. Dep. 13,800
Credit Old car 16,000

Second, record disposal of old car
Debit Car dealer 3,000
Credit gain on disposal 800
Credit Disposal 2,200

Third record purchase of new car
Debit New Car 20,000
Credit Car dealer 3,000
Credit Cash 17,000

[morgaine300]

Not sure where you are, but in the U.S. you can't take a gain on a trade-in of like items. The trade-in is done as all one entry, the gain isn't there, and the gain amount is subtracted off the cost of the new car. (This defers the gain.)

However, I agree that the info in the problem doesn't make any sense, not to mention that it doesn't say how it was paid for - cash and/or a note payable of sorts.

[rehmanvohra]

I agree with you that US GAAP has different treatment for exchange of similar assets. However, if the book value is 2,200 with a trade in value of3,000 and is exchanged for a new car worth 20,000, then it is quite obvious that the balance must have been paid in cash. The US GAAP does accept the treatment I have mentioned where boot is involved. I am in Pakistan and have replied using International Accounting Standards. If you prefer I can also quote from such US text book sources,e.g. Kieso, Chateen, Meigs. All of them are recognized authors. Further, a new car can not be treated as a similar asset when compared to old car.

[morgaine300]

When it is obvious that it's homework, I do everything from the common textbook ways of doing things. Nearly any principles textbook in the U.S. goes by what I stated.

And no it's not obvious that it's cash specifically. It might be a payable. It doesn't say.

[rehmanvohra]

When it is obvious that it's homework, I do everything from the common textbook ways of doing things. Nearly any principles textbook in the U.S. goes by what I stated.

And no it's not obvious that it's cash specifically. It might be a payable. It doesn't say.

I think I may have offended you and if so I am sorry since no offense is meant. However, the gain or loss will not be recognized if the exchanged assets are SIMILAR in substance. There is no similarity of the exchanged assets except that the assets are of the same nature, but we must also consider the commercial substance. I have read the chapter 11 of the Principles of Accounting by Larry Walther and have drawn a conclusion that the exchange in the question does not have a commercial substance since the future cash flows are expected to change by exchange of old car with a new one.

I agree that the question does not mention specifically about cash but then the liability will have to be settled in the future in cash or cash equivalent.

As has been agreed that the question is incomplete and my answers were supported by assumptions.

[morgaine300]

I think I may have offended you and if so I am sorry since no offense is meant.

I wasn't "offended." I was just explaining my response.

I have read the chapter 11 of the Principles of Accounting by Larry Walther and have drawn a conclusion that the exchange in the question does not have a commercial substance since the future cash flows are expected to change by exchange of old car with a new one.

Never heard of Larry Walther. How about some books I have heard of, like the ones used at the many schools that I tutor for. Accounting Principles, Weygandt, Kieso, Kimmel. (That would be the same Kieso and Weygandt who do an intermediate book where they jabber about the stuff you are, but leave it all out of the principles book.) Financial Accounting, Needles, Powers, Crosson. (Admittedly I can't get to the newest version of that one to see if it's changed, cause Cengage seems to think I don't have the latest version of Flash when I just installed it not two nights ago. Silly site.) Fundamental Accounting Principles, Larson, Wild. Accounting, Horngren, Harrison, Bamber - that one has one small paragraph & doesn't discuss gains & losses at all. But the rest of those say to count a loss and don't count a gain. That's mostly how these textbooks do it. Sometimes they try to simplify matters and sometimes they take 10 years to catch up.

The one book I know of that actually discusses commercial substance is Wild's Financial Accounting Fundamentals. It's in an appendix and not even the main part of the chapter. It defines it, doesn't explain it -- and why should it when FASB itself hasn't been exactly great at explaining it either? They aren't really expecting students at that level to try to draw the types of conclusions you are.

Point being - we still mostly teach it the old way.