Debits and Credits question

glued

Here is a most likely simple question that I just can't get my head around.

A man buys a new car worth $18,000. He pays $13,000 in cash and gets $5,000 trade in value for his old car which only had a carrying amount of $2,000. The traded in car was originally bought for $10,000. The only journal entries for this transaction are CR Bank $13,000 and DR Motor Vehicles $13,000. What journal entries have to be made to correctly account for this transaction?

I think the answer given in the solution may be wrong which is to CR Motor Vehicles $5,000. DR Acc Dep $8,000 and CR SPLOCI of $3,000.

myshirt

Journals are correct under US GAAP, even though you call it a SPLOCI.

Under IFRS I wouldn't treat that as a profit on disposal. The asset is a wasting chattel. So it's more of a discount. Nearly same effect on your financial statements though, just better to understand what you are doing.

littlemiss123

myshirt wrote: »

Journals are correct under US GAAP, even though you call it a SPLOCI.

Under IFRS I wouldn't treat that as a profit on disposal. The asset is a wasting chattel. So it's more of a discount. Nearly same effect on your financial statements though, just better to understand what you are doing.

I don't know is the fact that it is a wasting chattel relevant, that is more tax concept for capital gains tax than IFRS for recognising gains/losses. Under IFRS a car is still a fixed asset, and a disposal is treated the same whether it is wasting or not, so it would be correct to treat it as a profit on diposal and CR to the SPLOCI.

myshirt

You're right, I'm just making the point that it would be strange to make a profit on disposal of a car or any wasting chattel.

So the substance of the transaction here (excess of trade-in above fair value, assuming fair value) is really a discount on the new vehicle.

Journals are ultimately the same, but just the way you describe it. It's disingenuous to describe it as a profit on disposal, even if it's only an accounting profit.

dyanne

glued wrote: »

Here is a most likely simple question that I just can't get my head around.

A man buys a new car worth $18,000. He pays $13,000 in cash and gets $5,000 trade in value for his old car which only had a carrying amount of $2,000. The traded in car was originally bought for $10,000. The only journal entries for this transaction are CR Bank $13,000 and DR Motor Vehicles $13,000. What journal entries have to be made to correctly account for this transaction?

I think the answer given in the solution may be wrong which is to CR Motor Vehicles $5,000. DR Acc Dep $8,000 and CR SPLOCI of $3,000.

I realise you've probably already figured out the solution but sure will answer as best I can anyway.

CR Motor Vehicles 5000

- This is correct, the disposed asset needs to be removed from the Asset account (CR 10,000) and the trade in amount needs to be recognised as part of the current asset (DR 5,000)

DR Acc Dep 8000

- This is correct, the accumulated depreciation in relation to the disposed vehicle needs to be removed from the account, the nbv is 2000 which means there has been 8000 recognised in the acc dep account.

CR SOCI/PL 3000

- This is also correct, the carrying value of the disposed vehicle is 2000 - he received 5000 trade in, therefore, 3000 needs to be credited to the P&L as profit on disposal (as we previously debited 3000 more than necessary in depreciation)