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Firstly, I would like to ask trade in old motor vehicle to exchange for new motor vehicle is that considered as disposal of motor vehicle? If it is yes, kindly see the following example
Eg:
On 1 jan 2015, Ali bought car 1 for 18,000
Depreciation is 20% based on straight line methodOn 31 may 2016, Ali bought a new car (car 2) for $20,000 for credit from car seller and was allowed $5,000 in part exchange for his old car (car 1).
The accounting policy is full yr deprn in the year of purchase and no deprn in year of disposal
May I knw it means the cost of the new car is 20,000 or it means the cost of the new car is (20,000+5000)=25,000? If it is considered as 20,000, please continue to read the following.
The double entries :
On 1 jan 2015,
Dr Motor Vehicle (MV) 18,000, Cr Bank 18,000On 31 dec 2015,
Dr Deprn-MV (18,000X20%) 3,600, Cr Acc Deprn-MV 3.600Cost 18,000
Acc Deprn (3,600)
Carrying Amt as at 31 dec 2015 / 1 jan 2016= 14,400Since the acc policy is no deprn in the year of sales and therefore we do not need to charge deprn for the old car in year 2016. When we trade in we will get a rebate of 5,000 which means this is the disposal amt but no real money received (JUST a discount).
we need to compare the carrying amt 14,400 and the rebate amt (disposed amt) 5,000. The balancing figure will be (14,400-5,000)= 9,400 which is the loss on disposal of MV
To remove the carrying amount and put in the rebate amt.
Dr Acc Deprn (remove the old car acc deprn) 3,600
Dr MV (rebate) 5,000
Dr Disposal 9,400
Cr MV (remove the old car cost) 18,000When we closed the disposal account,
Dr Disposal 9400
Cr Loss on disposal (P/Loss) 9400After that, when we purchase the new car original amt is 20,000 but I get a rebate of 5,000 and there I only have to pay the balance 15,000
Dr MV (bal fig) 15,000
Cr Bank 15.000and we need to depreciate full year amount as per accounting policy mentioned
Dr Deprn (15,000X20%) 3000
Cr Acc Deprn 3000Therefore, the carrying amt as at 31 dec 2016 will be 12,000
Can help me to check whether my double entries is it correct?
Thanks Sir
Question 1) the new car costs $20,000 deducted from which is the $5,000 allowance received on car 1
$9,400 loss on disposal of car 1 … agreed
That double entry on the occasion of the disposal should be:
Dr Disposal account 18,000
Cr Car 1 account 18,000
Dr Accumulated depreciation account 3,600
Cr Disposal account 3,600
Dr Car 2 account 5,000
Cr Disposal account 5,000
Dr Profit or Loss account 9,400
Cr Disposal account 9,400Then, as you have proposed:
Dr Car 2 account 15,000
Cr Cash 15,000But depreciation should be based on the “true” cost of the new car 2 ie depreciation should be 20% x $20,000 = $4,000
Dr Depreciation account 4,000
Cr Accumulated depreciation account 4,000Clear now?
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