Standard Operating Procedures

SUBJECT: Trade-in of Similar Capital Equipment
SOURCE: Capital Asset Management, Office of the Treasurer
ORIGINAL DATE OF ISSUE: March 2008
DATE OF
LAST REVISION
February 2010
CSOP NO: 10.0
RATIONALE: To provide accounting guidelines for the trade-in of similar capital equipment in accordance with Generally Accepted Accounting Principles (GAAP).
CSOP:
  1. Trade-in of Similar Capital Equipment
  2. Setting up a requisition/purchase order involving the trade-in of similar capital equipment
  3. Cost basis adjustment
  4. Asset retirement for the trade-in of similar capital equipment
  5. Accounting for the trade-in of similar capital equipment using book value as the cost basis adjustment
  6. Accounting for the trade-in of similar capital equipment using FMV to determine the cost basis adjustment
    • FMV results in a loss
    • FMV results in a gain
  1. Trade-in of Similar Capital Equipment

    University 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 vendor and no trade-in allowance (cost reduction) is received, the asset given up is not considered a trade-in.

  2. Setting up a requisition/purchase order involving the trade-in of similar capital equipment

    Each line item on the requisition/purchase order will have a check box (assign to trade-in) where the user can specify which line items the trade-in allowance should be allocated to. If the trade-in indicator is on line one, the entire trade-in allowance will be applied against line number one. If the trade-in indicator is on line one and line two, the trade in allowance will be applied to both line items according to a percentage of the total cost. The trade-in allowance must be assigned to at least one line item before purchasing can approve the purchase order.

    The trade-in allowance amount is entered as a negative amount on the requisition as a below the line item, similar to freight.

    Trade-in allowances are allocated by the system using the following business rules:

    • For capital equipment, the system will assign object code 7070, using the account number of the line item selected to receive the trade-in allowance.
    • For capital lease purchases, the system will assign object code 7099, using the account number of the line item selected to receive the trade-in allowance. (See CSOP 9.0 Capital Lease Agreements)
    • For non-capital purchases, the system will assign the object code, and account number to match the line items that were selected to receive the trade-in allowance.

    When entering the trade-in allowance amount, the initiator of the requisition should enter the capital asset number of the asset being traded in. If the initiator does not know the asset number, it can be found using the Capital Asset Maintenance Screen in KFS. The initiator will need the IU tag number or the PO number to find the asset number.

    Please note, EPIC requisitions will only allow a full order discount OR a trade-in allowance, not both. If the vendor allows a full order discount AND a trade-in allowance, please add the discount and the trade-in allowance together and put them in the discount line. The University Capital Asset Office will issue a GEC to apply the trade-in allowance amount to object code 7070.

  3. Cost basis adjustment

    When 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.
  4. Asset retirement for the trade-in of similar capital equipment

    Once the organization and purchasing department have determined that an existing asset will be traded in, and the asset has been picked up by the vendor, 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:

     
    Account Number
    Object Code
    Debit
    Credit
    Loss on Disposition of Asset
    9520000
    4998
    $20,000
     
    Accum Depreciation - Equipment
    9520000
    8910
    $180,000
     
    Capital Equipment
    9520000
    8610
     
    $200,000

    It is important that the asset being traded in is on the same plant fund account as the newly purchased asset. When the asset retirement document is issued, it will route to the Capital Asset Office for approval. The Capital Asset Office will compare the plant fund account for the asset being retired against the plant fund account of the new purchase. If the plant fund accounts are not the same, the asset retirement document will be disapproved. The organization will need to issue an asset transfer document to transfer the asset being retired to the account of the newly purchased asset. Once the asset transfer document is approved, the organization can reissue the retirement document.

    Please note: If an asset is released to the vendor 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.

  5. Accounting for the trade-in of similar capital equipment using book value as the cost basis adjustment

    When 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:

    Description
    Account Number
    Object Code
    Debit
    Credit
    Capital Equipment
    1234567
    7000
    $750,000
     
    Trade-in Capital Equipment
    1234567
    7070
     
    $130,000
    Invoices Payable
    1234567
    9041
     
    $620,000
       
     
     
     
    Capital Equipment
    9520000
    8610
    $750,000
     
    Fund Balance
    9520000
    9899
     
    $750,000
       
     
     
     
    Capital Equipment
    9520000
    8610
     
    $130,000
    Fund Balance
    9520000
    9899
    $130,000
     

    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.

    Asset Given in Trade 123346  
       
    FMV of asset given in trade
    $20,000.00
    Less BV of asset given in trade
    $20,000.00
    Gain (Loss) on trade-in
    $0.00

    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.

    List price of asset(s) acquired  
    $750,000
     Less trade-in allowance
    $130,000
    Cash Paid
    $620,000
     
    Plus BV of asset given in trade
    $20,000
    Adjusted cost of asset purchase
    $640,000

    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:

    Description
    Account Number
    Object Code
    Debit
    Credit
    Capital Equipment
    1234567
    7000
    $20,000
     
    Transfer of Funds-Revenue
    1234567
    9915
     
    $20,000
             
    Loss on Disposition of Asset
    9520000
    4998
     
    $20,000
    Transfer Out
    9520000
    9900
    $20,000
     
    Capital Equipment
    9520000
    8610
    $20,000
     
    Fund Balance
    9520000
    9899
     
    $20,000

    The account number and object code used to adjust the asset cost is the account number and object code for the newly purchased asset. The asset retirement document generated a loss to object code 4998 for the asset that was traded in. The loss needed to be removed since no gain or loss was recognized from the asset that was traded in. The cost basis adjustment to the newly acquired asset is the same amount as the loss to object code 4998. When the JV is issued and approved, the loss to object code 4998 is removed and is applied as the adjusted cost basis to the newly acquired asset.

  6. Accounting for the trade-in of similar capital equipment using FMV to determine the cost basis adjustment

    If 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.
    FMV results in 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

    Asset Given in Trade 233467  
       
    FMV of asset given in trade $90,000.00
    Less BV of asset given in trade $100,000.00
    Gain (Loss) on trade-in ($10,000.00)

    Step B: Compute adjusted cost basis of asset(s) acquired

    List price of asset(s) acquired $750,000
    Less trade-in allowance $130,000
    Cash Paid $620,000
    Plus BV of asset given in trade $100,000
    Adjusted cost of asset purchase $720,000

    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:

    Description
    Account Number
    Object Code
    Debit
    Credit
    Capital Equipment
    1234567
    7000
    $100,000
     
    Transfer of Funds-Revenue
    1234567
    9915
     
    $100,000
             
    Loss on Disposition of Asset
    9520000
    4998
     
    $100,000
    Transfer Out
    9520000
    9900
    $100,000
     
    Capital Equipment
    9520000
    8610
    $100,000
     
    Fund Balance
    9520000
    9899
     
    $100,000

    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.
DEFINITIONS: Capital Assets must have an acquisition value of at least $5,000 and a useful life expectancy of one year or greater.

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.2
CROSS REFERENCE: CSOP 2.0 Asset Retirement
CSOP 3.0 Asset Transfer
CSOP 8.0 Capitalization of Moveable Equipment
RESPONSIBLE ORGANIZATION: All organizations purchasing items through a lease agreement.

1Intermediate Accounting, Kieso & Weygandt Ninth Edition, p.511
2Reference from Wikipedia