Replacement of assets

Open a Disposal account and debit that account with $4,000 (Credit the Asset account with $4,000)

Debit the Asset account with $7,500 and Credit Disposal account with $7,500

Balance off the Disposal account and take the profit on disposal to the Statement of Profit or Loss

Depreciate the new asset of $7,500 according to the entity’s depreciation policy

And finally, maybe revise F3 by following John’s lectures

Clear?

You already have done so, automatically! When you transferred the “book value is $4,000.00” you were in effect transferring the $XXXX cost and the $xxxx accumulated depreciation.

OK?

OK, pretend that this asset that you are part-exchanging – remember, it has a book value of $4,000 – originally cost $15,000 but has been depreciated by $11,000 up to the date of its disposal.

Now, when we transfer the carrying value / book value to the disposal account, isn’t that in effect transferring $15,000 cost from the asset account and $11,000 from the accumulated depreciation account?

Now do you see?

In the question that you have asked, there is no way that we can “remove the depreciation” because you haven’t told me the original cost and the accumulated depreciation up to the date of the trade in!

Give me that information and I’ll adjust my answer accordingly but, from the information you have given, everything that I have told you so far has been correct!

“by principle, do we remove the accumulated depreciation” – by principle, we HAVE!

When we took the book value to the disposal account we were in effect taking the cost and separately the accumulated depreciation to the disposal account

So, yes, in principle, we DO take the accumulated depreciation to the disposal account

OK?

First of all – what’s free of cost? I’ll assume that this is the cash-price with no trade-in involved

Second, I’m going to change your figures because there are too many $4,000 flying around. So the example I shall use will use the figures from my earlier post. The asset that we shall trade-in against the replacement asset originally cost $15,000 and has been depreciated by $11,000 – therefore has a book value of $4,000

The replacement asset has a cash price of $10,000 but the supplier will allow us a trade-in allowance of $3,500

Open a Disposal Account

Dr Disposal Account $15,000
Cr Asset Account $15,000

Dr Accumulated Depreciation Account $11,000
Cr Disposal Account $11,000

Dr Asset Account $3,500
Cr Disposal Account $3,500

Balance off the disposal Account and take the balancing figure (a loss of $500) to Statement of Profit or Loss

We now have a balance of $3,500 debit in the the Asset Account and must account for the remaining outstanding figure of $6,500

Dr Asset Account $6,500
Cr Cash (or Creditor) $6,500

And there you have it

Is that any clearer?

Your question is not clear! We need 4 values for a question like this – unless you’re going to combine two of them into “book value”

We need:

1 Original cost
2 Accumulated depreciation
3 Trade-in value
4 Cost price of new machine

Now, you may combine those first two and just have a single figure for book value

But we still need to know how much the new machine seller is going to allow us as a trade-in against the original machine

Imagine that you wish to exchange your car.

It originally cost you $6,000 3 years ago and now has a book value of $2,300

You go along to the car showrooms and see a new one that you would really like. The price of the new one is $9,950 so you ask the dealer how much he will give you as a trade-in allowance on your existing car and the dealer says $2,500

Now, give me the journal entries!

“the trade-in of new asset worth $7500 is free of charge.” – I’ve said this before …. I have no idea what you mean by this!

(Who is “OP”? Do you mean OpenTuition?”

Oh, OK, but I still have no idea what “exchanged for a new one worth $7,500.00 free of cost.” means!

Ah! Now I understand.

What an unlikely situation! Why would the owner of a new asset worth $7,500 let you have it in exchange for an old asset with a book value of $4,000

Yes, it COULD happen. If the new asset owner particularly wants your $4,000 asset.

Or if the $4,000 asset is (in the mind of the new asset owner) grossly under-valued

Or if your old asset fits strategically into the new asset owner’s plans for the future

But, come on! How often is that going to happen?

That’s good …. but you should have known those from your F3 studies

I know, you were exempt F3. Why? Because you (ill-advisedly) claimed the exemption based on some theoretical seminar at university that taught you nothing about the building blocks of accountancy – ie debits and credits

If you know of anyone that is thinking of claiming an F3 exemption, talk them out of it! It’s no cheaper to be exempt than it is to take the exam and you will be correspondingly stronger when it comes to F7 and P2

Well maybe you need to have another look at John’s F3 lectures and course notes – maybe you will understand them more thoroughly now that you’re into the higher level F papers