Trade-In of Old Farm Machinery for New Equipment

💡 Accountant's Note

Trade-ins are common in agricultural equipment markets. The accounting treatment: (1) Derecognize the old asset: remove the gross cost and accumulated depreciation, recognizing gain/loss = trade-in allowance minus net book value (NBV). In this example: trade-in value $22,000 − NBV $18,000 = $2,000 gain. (2) Recognize the new asset at its fair value (the list price of the new machine). The new machine is NOT recorded at the net cash paid — it must be at fair value. (3) The cash payment = new machine price ($95,000) − trade-in value ($22,000) = $73,000 (note: amounts in the entry reflect illustrative values). Key issue: dealers sometimes inflate trade-in allowances while embedding the same amount in the new machine's stated price — auditors and management should verify that both the trade-in allowance and new machine price reflect genuine market values.