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?

Do we eliminate the accumulated depreciation regarding this item of asset? Thank you.

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?

Sorry, still don't understand.

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?

So you mean we do not remove the accumulated depreciation and we continue to transfer the new asset's depreciation to the accumulated depreciation account? Thank you.

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!

But I mean by principle, do we remove the accumulated depreciation? Thank you.

"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?

Sorry, I am lost now. Let's assume on the scenario that the asset's current book value is 4000, with the cost price of 8000, so the accumulated depreciation is 4000. Now the replacement asset is 7500 free of cost. Could you show the journal entries for your explanation above? Thank you.

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?

Yes, now I get it. If the trade-in as stated by OP is 4000 book value (with 5000 accumulated depreciation) for a new one worth 7500. The journals will be open an disposal account, and: Dr Disposal account $4000 Cr Asset account $4000 Dr Accumulated depreciation account $5000 Cr Disposal account $5000 Dr Asset account $7500 Cr Disposal account $7500 The disposal account's balancing figure will be $8500 on the debit side, and will be taken that to the credit side of the income statement. And the Asset account now is having $7500 on the debit side? Thank you.

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!

Yes, I understand. I am simply following OP's scenario that the trade-in of new asset worth $7500 is free of charge.

"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?"

Sorry, OP means the Original Poster. He/she posted below: "if I have an asset and the book value is $4,000.00 and it was exchanged for a new one worth $7,500.00 free of cost. How should I account for this in my books?" And I was following on his//her thought.

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

I think maybe OP means one is offerred to have the $7500 asset in exchange of the $4000, free of charge. At least that's what I thought and based on which I asked the following question if the entries will be like: Dr Asset $7500 Cr Disposal $7500 Dr accumulated depreciation $5000 (say) Cr disposal $5000 Dr disposal $9000 Cr asset $9000 (say, at cost of the original asset) Then taking the balancing figure of $3500 to the income statement. Thank you.

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?

Yes, it's rarely. Thank you. Now I have learned double entries about two two possibilities.

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

Huh, actually I didn't get exempted any papers, though granted I passed F3 with very low mark, only 56...

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