Journals

AngelDust

Hi, I'm a bit stuck with the following question, not sure where to post the journals for the following?

On 20th December 2009 a car which had cost £12,500 and which had an accumulated depreciation balance of £7,500 was traded in for a new model priced at £20,000. A trade in allowance of £3,750 was received. The only entries so far made in respect of this have been to record the net cost of £16,250 in the cost of vehicles account and the cash book.

Can anybody clarify what the journal entry would be? My method is not adding up.

Many thanks!

CeeJaySix

dr Cost, cr Profit/Loss on disposal (in the P&L) 3,750.

This will record the correct cost of the new vehicle, and recognise the sales proceeds of the old vehicle.

dr Profit/Loss on disposal, cr Cost 12,500.
dr Accumulated depreciaion, cr Profit/Loss on disposal 7,500.

These remove the old vehicle's cost and depreciation from the balance sheet.

You will have a balance of (3,750 - 12,500 + 7,500) = 1,250 dr loss on disposal. You can check this quite simply: the net book value of the old vehicle is 12,500 - 7,500 = 5,000, but you only received 3,750 for it - the difference of 1,250 is lost.

AngelDust

Thanks @CeeJaySix

Are the entries more or less always the same with trade-in for new vehicles?

CeeJaySix

Yes - although you need to adjust for whatever has already been posted incorrectly.

In all cases, you need to remove the cost and accumulated depreciation of the outgoing asset, and recognise any profit/loss on disposal (which will be the difference between the cost less accumulated depreciation, and the trade-in value given); and add in the full cost of the new asset.

AngelDust

Thanks I don't remember finding journals so confusing at L2, L3 has thrown me a bit.

For more straight forward journals, e.g. if a sales account has been overstated by £500, would the journal be debit Suspense a/c £500 and credit Sales a/c £500? Am I right in thinking accounts which have been over/understated require Suspense accounts to hold the difference?

I really appreciate your help! @CeeJaySix

CeeJaySix

The difference will always be somewhere as that's how double-entry works (assuming your trial balance balances) - but it will only be in suspense if it's been posted there. For example, if a sale has been overstated, it's entirely possible that the other side will be an over-stated trade receivable rather than in suspense. It really is a case of reading the question carefully and working out what the current state is, what the correct state is (which will usually involve clearing a suspense account in AAT questions from memory), and figuring out how to get from one to the other.