Accounting for a part exchange not on books

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catja
catja Registered Posts: 17 New contributor 🐸
How do you account for the following

farm machinery used as a part exchange against more new farm machinery - but the old farm machinery has never been on the fixed asset register and hence in the books. An sales invoice has been raised for the sale of the asset for the HP company but of course it is paper only, no money has exchanged hands etc.

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  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    This is what I would do:

    Debit plant and machinery additions with the value of the new machinery.
    Credit sundry income with the value of the part exchange (it cannot be profit/loss on disposal of assets because the old machinery has never been in the books); and
    Credit cash/creditors with the balance.

    Had the old plant and machinery been in the books, then of course you would dispose of it in the normal way and the disposal proceeds included as a disposal on the capital allowances comp.

    Obviously if there are any VAT implications, debit input VAT to VAT account and credit output VAT on sale of old machinery.

    Tax will be payable on the sundry income (at corporate rates if a Ltd Co or individual rates if sole trader/partnership).
    Hope that helps

    Steve
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    Not sure I agree with this one.

    If the old machinery never hit the accounts then presumably it was purchased/financed by the owner.

    It should therefore be capital introduced or a credit to the DLA.

    Are you sure it has never been in the accounts?

    Some farm machinery is so old that it gets written off long before it is disposed. In that case you would have a profit on disposal and a CA's issue.

    It would be unusual for a sizeable amount of machinery never to have been recorded.
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    That is what I was thinking, but then I thought that if the plant and machinery had not been brought onto the books upon incorporation, but the company had raised the invoice, then it would seem improper to credit the directors loan account?

    There was recently a write up in the ICAEW technical magazine (I say recently but it was early last year!) where someone asked a similar question where a partnership had been incorporated, old assets brought in but unidentifable but the Ltd co had raised an invoice, in which case it was deemed to be other income.

    It could be that a variety of machinery had been included in the books at an estimated value upon incorporation. In this case, then yes, I would agree that it be disposed of as a normal asset disposal. However, I would not credit the directors loan account if I could not be sure the original machinery had been put through the books.

    Kind regards
    Steve
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    I'd be interested in reading that article if you are able to locate it Steve.

    I think Catja will have to do a little more digging to establish the right treatment but I cannot envisage any situation where the sale of a capital item could be deemed to be trading income.

    My gut feeling would be, as you suggest, that it is in the business but just not identifiable on the FA register, in which case a CA adjustment would be appropriate.
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    I'm afraid I can't provide a link as the technical articles we receive from ICAEW are paper based and as I'm not a member of ICAEW I'm unable to log into their archive.

    I verified this with one of our tax consultants as I was quite intrigued (sad really, but I needed to see if I was wrong). He said the same as I in that if the company had incorporated but had not brought the machinery onto the books (which I, personally, am not wholly convinced is the case) and the company raises an invoice for the uncapitalised items, which is subsequently in the company name and under the company's VAT registration number then this could be deemed as an income stream on the company. I agree with Dean that the sale of capital items would not be deemed as trading income, however in this instance we may not be talking about a capital item.

    However, without complicating the issue too much and delving into the depths of FRS 5 and section this that and the other of tax legislation, I think the final conclusion would be for the originator to (a) verify that the machinery is NOT in the books whether individually or in a 'global amount', then (b) confirm with the local tax office as to the required treatment, bearing in mind the materiality of the amount of tax in question.

    Best wishes
    Steve
  • catja
    catja Registered Posts: 17 New contributor 🐸
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    Okay (head buried in hands) I have further info now, it appears the assets were originally held by a partnership where a divorce is going through, one side seems to have disregarded the fact that no agreement as to who owns what has been decided and simply told his son the asset was in the books (as he is a director of the new company)This is a very brief explanation

    So the advisor is saying to show we should show it as an asset in the company' s books and then dispose of it via the normal route. I am tempted if that is the case to show it as a liability to the partnership until all is settled!

    Any ideas?:confused1:
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    You say 'advisor' - who is this?
  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
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    peugeot wrote: »
    You say 'advisor' - who is this?

    The same one that does not know that SSAP2 has been superseded by FRS18:001_smile:

    Poodle
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    Hmmm, yes Poodle, I think the 'advisor' needs to invest in an accounting standards manual!!

    Reading the other thread about the 'advisors' idea to prepay various costs, I understand this business is having it's first period's accounts prepared.

    Obviously with no knowledge of the divorce or dissolution of the old partnership and the effect (if any) this would have on the new Ltd Co., I suppose it is possible that you could bring the machinery into the books at its market at the date of incorporation and then dispose of it as normal, using the part ex value as disposal proceeds. This would keep the CA comp in order - this does assume that the asset is DEFINITELY NOT in the books, but there does seem to be conflicting statements being made in this regard!

    Best of luck.

    Steve
  • catja
    catja Registered Posts: 17 New contributor 🐸
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    peugeot wrote: »
    Best of luck.

    Steve

    Yep - I need it!

    For advisor read ACA but 20 years ago, brought in to set up company properly - owners now realising mistake!
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    Interesting thread!

    I think catja now has the required answers but as an after thought;

    If the machinery has never been brought into the books and subsequently raises an invoice for the sale of this machinery isn't there an argument to say that the company is not legally allowed to sell this asset? Therefore creating the credit to the DLA as Dean suggested? Wouldn't it be the company's administrative error as opposed to legality issue?

    Regards

    Dean
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
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    Dean,

    By going too far into FRS 5 issues before we know whether or not the company owns the machine is complicating things beyond necessity.

    The originator needs to confirm the full facts with his/her client before speculating on legalities and substance of transactions.

    This thread is not as "black and white" as it originally came across.

    Regards
    Steve
  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
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    peugeot wrote: »
    It could be that a variety of machinery had been included in the books at an estimated value upon incorporation.

    I have come across this in the past where there was a material item existing in assets called "chattles" and nobody actually knew what was in there! It was a large estate that had changed hands a couple of times.

    I have found that sometimes its just pot luck whith this sort of thing, and I know that some here will not like this but where there is no clear cut answer then just go with what your gut feeling is, as long as what you are trying to achieve provides a true and fair presentation of the facts....and wait to be challenged:001_smile:

    Poodle
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