Journal for Partial Payment and Trade-In of Vehicle incl. Depreciation
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: First up, if you don't really know what depreciation is or how it works then this question and solution will be too difficult for you at this stage. Depreciation is not really covered on this site but I do go over it in detail in my book Accounting Basics: Complete Guide. Here you can find detailed (but simple) explanations and numerous questions and exercises to fully test you on depreciation.
Now here's the full journal entry for the above (explanations below):
Dr Vehicle (new car)........................$20,000 Dr Accumulated depreciation.......$5,000 Dr Loss on exchange.....................$9,500 ($22,000 - $5,000 + $12,500 - $20,000) Cr Vehicle (old car - cost price)..............................$22,000 Cr Bank...............................................................$12,500
Looks complicated? It is. Let's break it down.
The way I approach a question like this is I work out the individual entries for getting rid of the old asset, for acquiring the new one, and any cash paid. Only then, right at the end, do I work out the profit and loss on the exchange.
As a first step, let's 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. And now, we need to remove this from our records.
This is an asset account, meaning that it is recorded on the debit side. If we want to get rid of it now we will reverse this by crediting it. So Credit Vehicle (old car) - $22,000.
The second step is to remove the second part of the old asset's records - the accumulated depreciation for that old car. Remember, the accumulated depreciation account is a sort of negative side of the asset account - showing how much the value has gone down over the years.
This negative part of the asset occurs on the credit side. So to get rid of it we debit the $5,000 accumulated depreciation. Another easy step is to record the cash paid. You simply credit your bank with that amount ($12,500).
And, of course, we are receiving the new car. And its value is $20,000. So we debit the vehicle account with $20,000.
Only after we've entered all these basic elements of the transaction, do we move on to our final calculation: working out the 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 over a total value of $29,500.
What are we getting in return? A new car worth $20,000.
So, we are actually losing out in this case.
And that loss comes to $9,500 ($29,500 - $20,000).
Remember again - always leave the calculation of the profit and loss as the final step. Record all the other elements of the transactions first!
That's it! Hope this vehicle exchange question and answer helped you.
Good luck with your studies!
Best, Michael Celender
FYI depreciation and accumulated depreciation are not really covered in detail on this website. Check out our official basic accounting books where you can find detailed but simple explanations as well as numerous exercises to test you fully on depreciation.