Accounting For Equipment Trade-Ins
Is your equipment becoming outdated? Are repairs and maintenance on old equipment eating at your bottom-line? With all of the technological advances of today’s machinery and equipment, trading in the old for newer more productive equipment is becoming more prevalent.
To illustrate the accounting for these different transactions, the following situations will be discussed:
- Accounting for similar assets
- Loss situation
- Gain situation - Accounting for dissimilar assets
These examples below do not take into consideration cash payments paid in addition to the equipment traded-in.
Accounting for similar assets
Exchanges of similar assets are those that are used to perform the same function, used in the same line of business or are the same general type of asset. An exchange of a Ford truck for a Chevy truck would be an example of an exchange of similar assets.
Loss situation
When similar assets are exchanged and a loss results, the loss should be recognized immediately for financial reporting purposes. To determine the loss and calculation of the basis of the new asset, please refer to the example below:
| Cost of old asset | 25,000 |
| Accumulated depreciation of old asset | (18,000) |
| Net book value | 7,000 |
| Trade in allowance on old asset | 6,000 |
| Less: net book value | (7,000) |
| Recognized loss on trade-in of old asset | (1,000) |
Since the old asset was traded-in, the cost ($25,000) and accumulated depreciation ($18,000) should no longer be recorded on the books, but the fair market value of the new asset should be added.
Gain situation
Gains on exchanges of similar assets are not recognized for financial reporting purposes. This is based on the theory that revenue is generated from the sale of a product or service using the fixed assets, not by selling them.
Using the example above, if the trade-in allowance was changed to $9,000,
the gain of $2,000 would not be recognized on the exchange, but instead
deferred. Please see below:
| Cost of old asset | 25,000 |
| Accumulated depreciation of old asset | (18,000) |
| Net book value | 7,000 |
| Trade-in allowance on old asset | 9,000 |
| Less: net book value | (7,000) |
| Deferred gain on trade in of old asset | 2,000 |
| Fair market value of new asset | 30,000 |
| Less: deferred gain on trade-in | (2,000) |
| Basis of new asset | 28,000 |
The gain is deferred by lowering the depreciable basis of the newly acquired asset, thus reducing the total amount of depreciation taken during the life of the asset by $2,000.
Again, since the old asset was traded-in, the cost ($25,000) and accumulated depreciation ($18,000) should no longer be recorded on the books, but the basis ($28,000) of the new asset should be added.
Accounting for dissimilar assets
An example of trading dissimilar assets is an exchange of machinery and equipment for land. Since the exchange was for dissimilar assets, a gain or loss on the exchange would be immediately recognized.
Need help?
If you are considering an asset exchange of similar or dissimilar assets, we can help you determine the impact the exchange would have on your financial statements.
Theola Eng
Assurance Services Dept.