when a company disposes of a fixed asset, sometimes they don't just sell it. Sometimes they trade it in or exchange it for a new fixed asset. Let's check it out. So we're gonna talk about exchanging for similar fixed assets. Okay. And this is when we're gonna trade something in trade in, let's say generally how these examples go as your training in, let's say an old truck for a new truck, right? And that old truck is gonna have some value. Maybe the dealership's gonna give you some trade in value for giving them the old truck. Well, that's what we're gonna deal and deal with here. Okay, So the trade in value when we give up the old equipment, well, that could be more or less than the netbook value, right? We're gonna have some netbook value that's sitting on our balance sheet for that old truck, right? It's gonna have some value on our balance sheet. What when we traded into the to the dealership, they don't know what we have, it's sitting on our balance sheet. They could give us more than that, less than that. Any difference between what we we actually uh receive and trade in value and what's in our net book value? That's gonna be a gain or loss on the exchange and that's going to go to the income statement. Okay, So there there can be a gain or loss if there's a difference between the netbook value and the trade in value we get from the dealership. Okay. Any other cash paid, Well, we call this boot. Okay, this is this is the name that it gets in this in these examples, and that comes from taxes and the taxes when we talk about some cash exchange, it's usually called boot. Okay, So they talk about one more interesting little term here and it's called commercial substance. So transactions are said to have commercial substance when they're gonna change future cash flows, okay, When future cash flows change as a result of the exchange, Well then that transaction has commercial substance and think about it. Our future cash flow is gonna change when we have an old truck and we trade it in for a new truck. Yeah, they're they're quite different, right? You're not trading an old truck for another old truck. Generally in these questions, what we're talking about is an old truck for a new truck. So the future cash flows are going to change and we say we have commercial substance and in this class we're only gonna deal with commercial substance. Okay, We're not gonna have transactions with no commercial substance that's left for higher level courses. Okay. So here we have the steps for dealing with an exchange and it's pretty simple. So we'll go through an example as well. The first step is to gather information regarding the new equipment and that's gonna be the price of the new equipment minus any trade in discount that we're going to get from the old equipment, right? So we're gonna get some discount for trading something in and that's gonna get us the cash we actually pay, right? So we're gonna have the price that they asked for minus any trade and discount. And then we're actually gonna pay the difference the cash, right? And this cash, like I said, that is the boot, that's when we talk about boot right there. So the second one is to gather information about the old equipment and that's about netbook value. We have to remember what we paid for it. The cost of the old equipment minus accumulated depreciation gets us our netbook value and we should be experts at that by now. Right? We've been dealing with netbook value a lot. And then the third step, well now that we've gathered all our information, we're ready to make our journal entry. First thing we wanna do, we're getting rid of old equipment, right? We're getting rid of the old truck and we're getting a new truck. So we got to remove the old equipment from the books. So the old equipment is going to get off our books with a credit, right? Because it's sitting as an asset with a debit balance while we get it off with a credit and the accumulated depreciation. Well, that's a contra asset with a credit balance. So we get rid of that with a debit. Okay, So those balances, we gotta clear out whatever balances on our books related to the old equipment and then we're gonna get new equipment right, we have this new asset for the new truck that we're gonna be getting and we're gonna add that new equipment to our books. With a debit right? That has to be a debit because it's an asset that we got. We're gonna remove any cash that we paid or maybe we created a liability, right? Maybe we didn't pay in cash. Now, we might have a notes payable instead of cash. Either way, that's gonna be a credit, right? Because if we pay with cash, well, the cash going away is a credit or if we make a liability, well, that would be a credit as well. And then we have to balance our equation. Any difference between these numbers is going to be a plug. So we're gonna see, do we need more debits? If we need more debits, then it's a loss. Do we need more credits? If we need more credits, then it's a gain, right? Credits are gains. Debits are losses so we're gonna plug in that last number to complete our entry. So let's check out an example here. These are pretty easy. Let's see how this goes on june 30th. The exchange corporation exchanged an old truck for a new truck. The old truck was purchased for $12,000 and had accumulated depreciation of $8000. The new truck had a list price of $16,000. But the dealership offered 4600 as a trade in allowance on the old truck The transaction has commercial substance. So they always love to throw that in there just to make it, make sure you know that we're gonna follow these rules. Journal eyes this transaction. Okay. Commercial substance an old truck for a new truck. So, let's leave those rules on the screen and let's go through it. So, the first thing, let's gather information about the new the new truck. So, the new truck. Well, we had the price, they told us the price had had a $16,000 price. And this will I'll put new over here. So, the new had a $16,000 price minus the trade in value of 40 600. That's the trade in. And that's going to equal the cash that we're gonna pay. We're gonna pay the difference, Right? So 16,000 minus 4600. That's gonna come out to 11,400. Right? And that's the actual cash that we're gonna pay. They didn't say anything about a note payable here. So, we're just gonna assume we pay the difference in cash. Alright? So now let's do the information about the old right? We got the new. Now let's do the old we're on to step two up there. OK. Step to gather information about the old. Well, this is finding the netbook value, right? The cost minus the accumulated depreciation. So the cost of the old truck, it was purchased for 12,000, right? So this is the cost. And remember, that's gonna be the value on our balance sheet, right? We're gonna have an asset for 12,000 and we're gonna have a contra asset for the accumulated depreciation of 8000. And I'll put that here accumulated depreciation. So it's gonna have a netbook value of 4000, right? The cost minus accumulated depreciation equals our netbook value of 4000. Alright, so now we've gotten all our information all in one place. Let's go ahead and make our journal entry. Let's start with removing the old equipment. Right? So the old equipment, there was gonna be some balance on our balance sheet as an asset for 12,000. So that's gonna be a credit here. We're going to credit equipment. And remember, we don't have to do it all in order, especially with a journal entry like this. Well, we're gonna be making a plug. So we want to get all everything that we know onto the paper first. So this is a credit for equipment actually gonna do it in a different color so we can see it separately. So credit for equipment And that's gonna be in the cost, right? The historical cost of 12,000, that's gonna be our credit and we gotta get rid of the accumulated depreciation related to that with a debit, right? It was sitting with a credit balance. So let's get rid of that accumulated depreciation with a debit for 8000. Right? And

Exchange for Similar Assets

Asset Exchanges