[susan1sars]

the book value of 2 trucks is 15,679 with loan balances of 43,669. Dealership's gross allowance is 39,000 and the cost of the new vehicle is 29,700. Amount financed for new vehicle is 26,186. Dealership pays of outstanding debt on old vehicles. Would you realize a gain on this trade? What would you record as the cost of the new vehicle? I figured a gain of 19,450 but I am not sure this is the correct way to handle this.
Thank you
Susan

[codyman144]

So you are trading in two trucks for one, not quite following this here? Also, if this is a like-kind exchange you do not recognize gain or loss you simply roll it into the basis of the new Vehicle. Please clarify your answer a little and I will help you.

[this8384]

I don't think your calculations are right. If the book value on the 2 trucks is only $15,679 then that's all the dealership will give you for them; that means you'll still owe $27,990 on the trucks. The dealership may roll over that balance into your loan for the new car but then you're going to owe $54,176 on one vehicle.

[codyman144]

I don't think your calculations are right. If the book value on the 2 trucks is only $15,679 then that's all the dealership will give you for them; that means you'll still owe $27,990 on the trucks. The dealership may roll over that balance into your loan for the new car but then you're going to owe $54,176 on one vehicle.

This is not true.

First the dealership can give you whatever they want as trade in value for the trucks; it would be like if you sold it to a person they can pay whatever you both agree on. Second book value has nothing to do with your existing loan balance or how much the dealership will give you for the trucks. Book value equals Fixed Asset – Accumulated Deprecation.

You might be thinking of book value as the Kelly Book or Blue Book value but that has nothing to do with accounting.

[this8384]

Book value has everything to do with trading in a car. Dealers make their money by underpaying to buy a car and then selling it for more than they bought it for. This is why the OP has 2 trucks worth about a third of what she owes on them.

[codyman144]

Book value has everything to do with trading in a car. Dealers make their money by underpaying to buy a car and then selling it for more than they bought it for. This is why the OP has 2 trucks worth about a third of what she owes on them.

Yeah but this is accounting the book value she is talking about is not the book value you are thinking of...

[this8384]

Please elaborate.

From what I've gathered from her post, she's talking about trading 2 trucks in and buying a new one. She's asking if it will be a gain or loss. Clearly, it's going to be a financial loss, and a huge one at that, as the one new truck will never be worth as much as she will owe.

[JudyKayTee]

Yeah but this is accounting the book value she is talking about is not the book value you are thinking of...

Now I'm confused. Is this a real life "what should I do?" question or a homework question?

I assume it's real life because other people on the accounting board have been asked not to help with homework and the OP on other occasions has been told to post on the homework thread.

So in real life doesn't the OP end up owing more on a vehicle than it's worth?

[this8384]

Now I'm confused.

You're not alone!

I still don't see how "accounting value" and "book value" are any different. An amount of money doesn't change.

I'm trying to figure out if the OP is a student with a homework problem, an owner of a vehicle, or a dealership trying to do the books.

[JudyKayTee]

You're not alone!

I still don't see how "accounting value" and "book value" are any different. An amount of money doesn't change.

I'm trying to figure out if the OP is a student with a homework problem, an owner of a vehicle, or a dealership trying to do the books.

Can't be homework so it's got to be #2 or #3.

[codyman144]

Please elaborate.

From what I've gathered from her post, she's talking about trading 2 trucks in and buying a new one. She's asking if it will be a gain or loss. Clearly, it's going to be a financial loss, and a huge one at that, as the one new truck will never be worth as much as she will owe.

She posted this on the accounting board, so I am assuming the she is talking about the concept of gain or loss as it relates to accounting. In accounting book value of an asset has nothing to do with Fair Market Value. As I said earlier book value is simply the value of the asset in the fixed asset account (at cost) less accumulated depreciation of that asset. Gain or loss at disposal of an asset is simple if you sell it for cash: Compare book value vs. the amount of cash you have received to compute gain or loss. Say an asset is fully depreciated therefore book value is zero, but the asset is actually worth something (fair market value) therefore if you sell it, you book it all as a gain.

I didn’t even look at the numbers yet to see if it is a gain or a loss because I am waiting for her to reply to my request that she clarify her question. :cool:

[codyman144]

Now I'm confused. Is this a real life "what should I do?" question or a homework question?

I assume it's real life because other people on the accounting board have been asked not to help with homework and the OP on other occasions has been told to post on the homework thread.

So in real life doesn't the OP end up owing more on a vehicle than it's worth?

I can't tell if it is homework or if she is an accountant who isn't sure how to book this transaction. Given the information she provided it doesn't look like an obvious homework question so I was acting in good faith by tiring to help her.

[susan1sars]

Revising earlier question. My book side: 2 new trucks cost was 78,394; accum depr is 62714 which equals book value of 15680. Loan balance on these trucks is 35,130.
Trade in on 1 new truck. Dealer side: New Vehicle =29,870; Gross allowance=39,003;
Negative (9,133); dealer pays off note balance of 35,130; total cost for vehicle is 32,045 less net trade in of 3,852 = 28,193 which is the amount financed on new vehicle. Would I report this as a gain of 19,450? I am not quite sure how to handle this.

[JudyKayTee]

I can't tell if it is homework or if she is an accountant who isn't sure how to book this transaction. Given the information she provided it doesn't look like an obvious homework question so I was acting in good faith by tiring to help her.

OP answered by opening a new thread which I have asked to be combined with this thread.

Revising earlier question. My book side: 2 new trucks cost was 78,394; accum depr is 62714 which equals book value of 15680. Loan balance on these trucks is 35,130.
Trade in on 1 new truck. Dealer side: New Vehicle =29,870; Gross allowance=39,003;
Negative (9,133); dealer pays off note balance of 35,130; total cost for vehicle is 32,045 less net trade in of 3,852 = 28,193 which is the amount financed on new vehicle. Would I report this as a gain of 19,450? I am not quite sure how to handle this.

[JudyKayTee]

Revising earlier question. My book side: 2 new trucks cost was 78,394; accum depr is 62714 which equals book value of 15680. Loan balance on these trucks is 35,130.
Trade in on 1 new truck. Dealer side: New Vehicle =29,870; Gross allowance=39,003;
Negative (9,133); dealer pays off note balance of 35,130; total cost for vehicle is 32,045 less net trade in of 3,852 = 28,193 which is the amount financed on new vehicle. Would I report this as a gain of 19,450? I am not quite sure how to handle this.

New thread, changing original post. Needs to be combined for ease in answering.

Somewhat changes circumstances on other thread.

Is this homework, a "personal question," an accounting problem?

[codyman144]

Revising earlier question. My book side: 2 new trucks cost was 78,394; accum depr is 62714 which equals book value of 15680. Loan balance on these trucks is 35,130.
Trade in on 1 new truck. Dealer side: New Vehicle =29,870; Gross allowance=39,003;
Negative (9,133); dealer pays off note balance of 35,130; total cost for vehicle is 32,045 less net trade in of 3,852 = 28,193 which is the amount financed on new vehicle. Would I report this as a gain of 19,450? I am not quite sure how to handle this.

$19,450 is right for the gain if it were an exchange simply for cash but because your are exchanging like-kind property other rules apply. You must measure the book value of the assets exchanged vs. the total consideration given for those assets. But because you will still find a gain here and you have received boot (other compensation and/or the relieving of debt obligations) it gets a lot more complex here so I suggest you read this page all the way through.

Accounting for like-kind exchanges. | Professional Services > Accounting, Tax & Auditing Services from AllBusiness.com

Especially this part on page 7

Paragraph 22 of APB Opinion No. 29 requires that when boot is received in a like-kind exchange a realized gain must be recognized to the extent that the boot received exceeds a proportionate amount of the book value of the asset given in the exchange.
To determine the portion of the asset given up that is deemed to have been sold for the boot received, the book value of the asset given in the exchange is multiplied by the fraction of the boot received divided by the sum of the boot received and the fair market value of the like-kind asset received. The gain realized is recognized to the extent that the boot received exceeds this portion of the book value of the asset given up.
For tax accounting Sec. 1031(b) states that if a gain is realized, the gain that is recognized will be limited to the boot received. The gain that is recognized can never exceed the gain that is realized. Thus, if the boot received exceeds the gain realized, the gain recognized will equal the gain realized. This is in accordance with the wherewithal-to-pay principle of taxation.
To the extent that the taxpayer has received boot, he is deemed to have the funds needed to pay taxes. Thus, the gain that is realized is recognized to the extent of the boot received.

Come back and let me know if you have any questions after you read that. Thanks - John

[susan1sars]

If I understand the APB opinion, I would now realize a gain of 26,000 instead of the original calculation of 19,450. Thank you codyman144 for your help. Please let me know if I interpreted this correctly. Thank you, Susan

[codyman144]

If I understand the APB opinion, I would now realize a gain of 26,000 instead of the original calculation of 19,450. Thank you codyman144 for your help. Please let me know if I interpreted this correctly. Thank you, Susan

Sometime tonight I will try to find some time to sit down and do the calculations and let you know. If not tomorrow okay?

[susan1sars]

Tomorrow woud be great codyman144. I appreciate your help so much.
Thank you. Susan

[codyman144]

If I understand the APB opinion, I would now realize a gain of 26,000 instead of the original calculation of 19,450. Thank you codyman144 for your help. Please let me know if I interpreted this correctly. Thank you, Susan

Here is the way I see it:

Boot received = 9,133 (39003-29870)

So then we must do this (copied from above):

Paragraph 22 of APB Opinion No. 29 requires that when boot is received in a like-kind exchange a realized gain must be recognized to the extent that the boot received exceeds a proportionate amount of the book value of the asset given in the exchange.
To determine the portion of the asset given up that is deemed to have been sold for the boot received, the book value of the asset given in the exchange is multiplied by the fraction of the boot received divided by the sum of the boot received and the fair market value of the like-kind asset received. The gain realized is recognized to the extent that the boot received exceeds this portion of the book value of the asset given up.

So Gain = Boot * (boot / (boot + FMV of assets acquired)

Gain = 9,133 * (9,133/(9,133+29,870)

Gain = 9,133 * (9,133/39,003)

Gain = 9,133 * .23

Gain = $2,100.59

That is what you would book to an account like Gain on Disposal of assets. The rest would be rolled into the value of the new asset. In this case it would reduce the value of the asset when capitalized.

That is how I read it and I am pretty sure I did it right, but this is not my area of expertise so you might want to get another opinion.

Also this seems to back me up:

http://cpaclass.com/gaap/apb/gaap-apb-29.htm