Journal for Partial Payment and Trade-In of Vehicle
Q: Paid $12,500 for a car which cost $20,000 with the garage accepting $7,500 in part exchange. The old car cost $22,000 and had depreciated by $5,000.
A: The journal entry would be:
The first step is to take a look at the old car. It's original cost was $22,000. This original purchase amount never changes in this account. You bought it for $22,000, the cost 5 years later is still $22,000. This is an asset account so would be on the debit side. To get rid of it (reverse it) we credit it now.
Dr New car....................$20,000
Dr Accumulated depreciation.......$5,000
Dr Loss on exchange...............$9,500 ($22,000 - $5,000 + $12,500 - $20,000)
Cr Old Car (cost price)............................$22,000
Looks complicated? It is. Let's break it down.
The second item is the accumulated depreciation for that old car. This account is a sort of negative side of the asset account - showing how much the value has gone down - and it occurs on the credit side. So to get rid of it we debit the $5,000 accumulated depreciation.
Next step is to record the cash paid, which is pretty simple. You simply credit your bank.
And of course we are receiving the new car. And its value is $20,000. So we debit this.
The last step is to work out if there was a profit or loss regarding this whole exchange of cars. Since we are trading in a car worth $17,000 ($22,000 - $5,000) AND we are paying $12,500, we are giving $29,500 in value in total.
What are we getting in return? A new car worth $20,000.
So we are losing out. And that loss comes to $9,500 ($29,500 - $20,000).
FYI depreciation and accumulated depreciation are not covered in detail on this website. Check out our official basic accounting books where you can find detailed (yet simple) explanations and numerous questions and exercises to fully test you on depreciation.