A part-exchange occurs when payment for a new asset is made, at least in part, by trading-in an existing asset. It is commonly used by businesses (and individuals) when purchasing vehicles.
The key to recording a part-exchange transaction is to recognise that it is in fact two transactions, a purchase and a sale and then deal with each in turn.
A business buys an Audi car which costs £35,000. The car was paid for using a bank payment of £12,000 and the balance of the cost (i.e. £23,000) was paid by trading in a BMW car which originally cost £40,000 and against which accumulated depreciation of £15,000 had been charged.
We will first deal with the journals relating to the purchase of the Audi (alternatively you could deal with the sale of the BMW first).
The first journal will record the bank payment of £12,000.
|Vehicles at cost||£12,000|
The next journal will record the trade-in value of the BMW. This will be debited to the Vehicles at cost account and credited to the Disposal of vehicles account.
|Vehicles at cost||£23,000|
|Disposal of vehicles||£23,000|
The journals will then be posted to the ledger accounts as shown below:
Now that the purchase of the Audi has been recorded we can record the sale of the BMW. Note that the disposal proceeds of £23,000 for the car have already been recorded so all that is required is to remove the car’s cost and accumulated depreciation using the following two journals.
|Disposal of vehicles||£40,000|
|Vehicles at cost||£40,000|
|Vehicles accumulated depreciation||£15,000|
|Disposal of vehicles||£15,000|
The ledger accounts would then be updated for these journals:
Finally, we can close down the Disposals of Vehicles account and thereby calculate the gain or loss made on the disposal of the BMW.
The £2,000 represents a loss on disposal as the carrying value of the BMW was £25,000 (i.e. £40,000 less £25,000) but the car was sold for £23,000.