Asset Purchase With Trade-In

by Lake, Bookkeeping Essentials
(British Columbia, Canada)

I am currently studying to take my Certified Professional Bookkeeping exam (March 2010).

One of the study materials I am using is John Day's Real Life Accounting for Non-Accountants. This course is designed to teach small business owners how to do their own books, prepare their own financial statements, and how to use the financial statements as a management tool.

This course is written from a U.S. accounting perspective. I am learning that some accounting events are treated a bit differently than in Canada ... which comes as no surprise.




Canadian Treatment

The latest accounting event I've come across that has a slightly different accounting treatment than in Canada is recording the trade-in of an asset while purchasing a new asset.

In Canada, any gain or loss on the disposition of the asset as a result of the trade-in is recognized as such. Follow the link above for the bookkeeping entries.

(Please note that I'm not addressing the tax treatment here, which is slightly different ... just the accounting treatment.)




U.S. Treatment

However, in the U.S., any gain or loss on the disposition of the asset as a result of the trade-in is transferred to the cost of the new asset ... NOT recognized as a gain or loss on the income statement.

The bookkeeping entry has two parts and would look like this:

Part one: To record sale of trade-in asset and remove the sold asset from the books:

Debit (Decrease) Cash in Bank for trade-in value (current asset on balance sheet)

Debit (Decrease) Accumulated Depreciation - Sold Asset - or the proper account where the depreciation was booked (capital assets section on your balance sheet)

  Credit (Decrease) Sold Asset whatever that account was (capital asset on balance sheet)

Debit or Credit New Asset (capital asset on balance sheet) the remaining difference is the gain or loss made on the trade-in of the old asset.

Part two: To record the purchase of the new asset:

Debit (Increase) New Asset at full purchase price to recognize the acquistion (capital asset on balance sheet)

  Credit (Increase) Bank Loan net proceeds received (long term debt on balance sheet)

  Credit (Decrease) Cash in Bank for down payment (current asset on balance sheet)

This can all be booked in one journal entry ... so that the Cash in Bank that you actually pay out is the credit in part two less the debit in part one.

Depreciation vs. Amortization

Another difference between Canada and the U.S. is the use of the word depreciation versus amortization.