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SUBJECT: |
Trade-in of Similar Capital Equipment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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SOURCE: |
Capital Asset Management | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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ORIGINAL DATE OF ISSUE: |
March 2008
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DATE OF LAST REVISION: |
December 2021
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CSOP NO: |
10.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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RATIONALE: |
To provide accounting guidelines for the trade-in of similar capital equipment in accordance with Generally Accepted Accounting Principles (GAAP). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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CSOP: |
Trade-in of Similar Capital Equipment Setting up a requisition/purchase order with a trade-in Asset retirement for the trade-in Book value to determine the cost basis adjustment Fair Market Value (FMV) to determine the cost basis adjustment Trade-in of similar capital equipmentUniversity owned equipment may be offered for trade-in on similar equipment. Similar equipment has the same general purpose, is the same general type, and is used in the same line of business, such as the trade in of a computer for another computer. A trade-in allowance is a reduction of the total cost of an invoice from a vendor. If an asset is given to a supplier and no trade-in allowance (cost reduction) is received, the asset given up is not considered a trade-in. For instructions on how to create a requisiton see: Create a Requisition with a Trade-In Cost basis adjustmentWhen an asset is traded in and an allowance is received, a cost basis adjustment is made on the purchased asset. Book value is used for this adjustment, unless the book value is $50,000 or more. Book value is the historical cost of an asset less the accumulated depreciation at the time of trade-in. The book value will be added to the cost of the newly purchased asset. If the book value of the asset is $50,000 or more, the organization is required to obtain the fair market value of the asset. If the organization chooses to supply the University Capital Asset Office with the fair market value, even though they are not required to, the fair market value will be used for the cost basis adjustment. The organization will be required to supply supporting documentation for the fair market value, such as references to the realizable value of similar assets sold for cash, quoted market prices, or independent appraisals.
Asset retirement for the trade-inOnce the organization and purchasing department have determined that an existing asset will be traded in, and the asset has been picked up by the supplier, the organization will need to issue an asset retirement document for the asset traded in. When issuing the asset retirement document, the correct retirement reason code to use is 2 for Trade-in. A note needs to be included that will inform the Capital Asset Office of the purchase order from which the new asset is being purchased. The asset retirement document will generate the following entries to the plant fund accounts if the asset is not fully depreciated:
Please note: If an asset is released to the supplier and no trade-in allowance (cost reduction) has been received, the asset retirement reason is 4 for discarded. For information on how to retire an asset please refer to the asset retirement training document. Book value to determine the cost basis adjustmentWhen the purchase order has been fully invoiced and is closed, the accounting process will begin. The calculations and entries that follow will be taken care of by the University Capital Asset Office. The following is presented for information purposes only. For example, PO 155678 has been issued for a new printing press with a purchase cost of $750,000. Line one has been selected to receive the trade-in allowance. The trade-in allowance of $130,000 has been indicated below the line item with asset number 123356 indicated as the asset being traded in. The purchase meets capitalization requirements and uses object code 7000. The Payment Request will create the following entry in the general ledger:
The new asset number created for this example is 187567. Asset number 123356 has been retired as traded in and has a book value of $20,000. The cost basis adjustment to asset number 187567 is calculated as follows: Step A : Compute the gain or loss from trade-in.
Please note: No fair market value was given by the organization. In the above calculation, FMV becomes the BV of the asset given in trade. Step B : Compute adjusted cost basis of asset(s) acquired.
Step C : Entry to adjust the cost basis of asset number 187567. A journal voucher will be used to adjust the cost basis of asset number 187567 as follows:
Fair market value (FMV) to determine the cost basis adjustmentIf the FMV of the asset traded in is reported to the University Capital Asset Office, the FMV will be used to calculate the cost basis adjustment. When using FMV for the trade-in of similar equipment, any gain on the exchange should not be recognized and any loss on the trade-in will be recognized. According to GAAP when similar equipment is traded for similar equipment, the earnings process is not considered complete and a gain should not be recognized. 1 Please note, if the book value of the asset being traded in is $50,000 or more the University Capital Asset Office will require the organization to determine the FMV of the asset being traded in. FMV less the book value of the asset results in a gain or a loss. Asset number 233567 has been retired as traded in with a book value (loss to 4998) of $100,000. The organization gave the University Capital Asset Office a FMV of $90,000 along with supporting documentation. The cost basis adjustment to the newly purchased asset is calculated as follows: Step A : Compute the gain or loss from trade-in
Step B : Compute adjusted cost basis of asset(s) acquired
Step C : Entry to adjust the cost basis of asset number 187567. A journal voucher will be used to adjust the cost basis of asset number 187567 as follows:
If the exchange transaction involves similar equipment and results in a gain the amount of the gain is not recognized. The FMV of $110,000 less the book value of $100,000 resulted in a gain of $10,000. This gain will not be recognized. The retirement of asset number 233467 generated a loss of $100,000 (Dr to 4998 when 233467 was retired). When the journal voucher above is approved, the loss to object code 4998 is credited and no gain is recognized. The cost basis adjustment to asset number 187567 will increase the asset cost by $100,000. |
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DEFINITIONS: |
Capital Equipment- must have an acquisition value of at least $5,000 and a useful life expectancy of one year or more. Equipment- The term “equipment” includes delivery equipment, office equipment, machinery, furniture and fixtures, factory equipment and similar fixed assets. Fair Market Value - The Fair Market Value (FMV) is the price that a willing buyer would pay to a willing seller, in a free market, for an asset or any piece of property. |
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CROSS REFERENCES: |
CSOP 2.0 Asset Retirement
CSOP 3.0 Asset Transfer CSOP 8.0 Capitalization of Moveable Equipment |
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RESPONSIBLE ORGANIZATION: |
Organizations that purchase capital assets with a trade-in. |