Journal Entry for Trade-in Vehicle

Trade-in Vehicle is the process that company gives the back the vehicles to the supplier to reduce the price of a new purchase vehicle.

The suppliers allow the customer to trade in the old vehicles to encourage the customer to purchase a new one. The old vehicle will be trade-in and reduce the cost of the new one. it will help the supplier to increase their sales volume. Moreover, it also helps to sell to the existing customers who are already loyal to the previous product. The supplier will receive profit from both vehicles.

For the customers, it helps to get rid of the old car which may be hard to sell somewhere else. It is simply the exchange of old fixed assets with new fixed assets. We have removed the old fixed assets net book value from the balance sheet. At the same time, we have to record the new fixed assets.

The disposal of the old vehicles will result in gain or loss which will appear in the income statement. The new vehicle needs to record based on the fair value, not the net amount.

Journal Entry for Trade-in Vehicle

When the company trade in an old vehicle for a new one, it simply means they sell the old one and buy a new one. There is two business transaction that happens during the trade-in. For easy understanding, we will separate the transaction into two as follows.

First, the company has to get rid of the old vehicle. It is the same as selling fixed assets, we have to reverse both the cost and accumulated depreciation of the assets. At the same time, we have to recognize gain or loss from the disposal. The sale proceeds are equal to the amount of deduction that the supplier provides. And we will not receive the cash but the cost deduction of the new vehicle. We compare the cost deduction amount with the net book value to get the gain or loss.

The journal entry is debiting accumulated depreciation, trade-in Proceeds, and credit fixed assets cost and recognized gain or loss.

Account	Debit	Credit
Trade-in Proceeds	$$$
Accumulated Depreciation	$$$
Fixed Assets – Cost		$$$
Gain on disposal		$$$

In normal disposal transactions, we will record cash or accounts receivable instead of trade-in proceeds, but it is not the case here. We will not receive cash and this account will be reversed in the next transaction.

When receiving new vehicle, we have to record fixed assets and cash paid which include the proceed that receive from old vehicle.

Account	Debit	Credit
New Vehicle	$$$
Cash		$$$
Trade-in Proceeds		$$$

The trade-in proceeds will be reversed to zero, and decrease the new vehicle value. Actually, we can combine both transactions as follow:

Account	Debit	Credit
New Vehicle	$$$
Accumulated Depreciation – Old Vehicle	$$$
Fixed Assets – Cost of old Vehicle		$$$
Gain/Loss		$$$
Cash		$$$

Example

ABC is a trading company. The company traded in an old car that cost $ 70,000 and accumulated depreciation of $ 40,000. The new car cost $ 100,000, however, the supplier will provide a discount of $ 20,000 if the company trade in the old car. Please journal entry for a trade-in vehicle.

ABC has the option to trade in the old car for a discount of $ 20,000 on a new car. It is not the discount but the net off of old car value for a new car. It simply means the company sells an old car for $ 20,000 and buys a new car that costs $ 100,000. They end up paying $ 80,000 only.

First, we have to calculate the gain or loss from the disposal of an old car.

Loss from disposal = $ 20,000 – ($ 70,000 – $ 40,000) = $ 10,000

ABC has to reverse the cost and accumulate depreciation of the old car and record a loss of $ 10,000. At the same time, they have to record a loss of $ 10,000 alongside with new car. The journal will be the following:

Account	Debit	Credit
New Vehicle	100,00
Accumulated Depreciation – Old Vehicle	40,000
Loss on disposal	10,000
Fixed Assets – Cost of old Vehicle		70,000
Cash		80,000