USA Finance

Aug 13 2017

Bookkeeping Basics – How To Record New Car and Remove Old Car #small #cars


#vehicle trade in value
#

Bookkeeping Basics – How To Record New Car and Remove Old Car

As an accountant and tax specialist for going on 20 years, I have received many phones calls from bookkeepers asking me how to get the new car on the books and the trade-in off. To do so, there are a few other considerations that come into play. Let’s break them down.

The Trade-In Vehicle

By trading in this vehicle, you have sold it. Since you used it to purchase a similar asset, you can roll any gain on the sale into the new asset. Therefore, you need to determine if you have a gain on the sale, and if so, how much that gain is. The gain will be the trade-in value less your “book basis” of the vehicle. For instance, if you were given a $6,000 trade-in allowance for the vehicle and it had a $2,000 book basis, the gain on its sale would be $4,000.

What is the book basis of the vehicle? To determine this you need to know the original depreciable basis of the vehicle and the accumulated depreciation on it. If you bought the vehicle more than six years ago and used MACRS to depreciate it, you should not have any remaining basis. It should be fully depreciated. If you have had the vehicle fewer than six years but elected to take a Section 179 deduction the year you purchased it, you probably have no remaining basis. Once you have determined your basis, figuring your gain is simple.

The New Vehicle

Have your purchase document for the new vehicle handy to get the asset set up properly. The first thing you need to determine is the total cost of the new vehicle. Many people ask whether the sales tax should be recorded separately as an expense or included in the purchase price. The answer is the latter. The licensing, sales taxes, extended warranties, or other add-ons should all be included in the total purchase price. However, you need to reduce the total sales price by rebates or other discounts. To proceed to recording the new asset, you need to know the total amount financed and the total down payment in addition to the information discussed above. These can also be found on the purchase document for the new vehicle.

The Journal Entry

Let’s Assume:

  • Old vehicle depreciable cost: $9,000
  • Old vehicle accumulated depreciation: $8,000
  • New vehicle total cost: $21,000
  • Trade-in allowance: $3,000
  • Total down payment: $5,000
  • Total financed: $13,000

Here is the journal entry:

Debits:

  • Accumulated Depreciation – Old Vehicle $8,000
  • Fixed Assets – New Vehicle – $19,000

Credits:

  • Fixed Assets – Old Vehicle $ 9,000
  • Loan Payable – New Vehicle 13,000
  • Cash 5,000

Notice that that new vehicle has a basis of only $19,000. This is because the total cost of $21,000 has been reduced by the gain on the trade-in vehicle. Its book basis was $1,000 and it was “sold” for $3,000. Therefore, it was sold at a gain of $2,000. Instead of recognizing a $2,000 gain on the sale of assets, we can roll that gain into the new vehicle by reducing its basis. You will want to note this in your journal entry notes to create an audit trail. An alternative would be to debit the new fixed asset $21,000 and then credit the same asset for $2,000, noting that the $2,000 is the rolled over gain on the trade-in.

Be aware if you are using a General Ledger program with a Fixed Asset module, it may be set up to retain the traded in vehicle and finish depreciating it even though it is gone. Refer to the program’s manual for instructions on how to properly tie the trade-in to the new asset.

Notice that every account involved in the sample journal entry is a Balance Sheet account. The Income Statement is completely unaffected by it. The expenses will be taken in the form of Depreciation Expense and Interest Expense paid on the loan.


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