In the previous article, we have covered the journal entry for disposal of fixed assets which mainly focuses on the discard and sales of fixed assets.
In this article, we cover the accounting for exchange of fixed assets which is part of the fixed asset disposal. This includes the journal entry for gain and loss on exchange of fixed assets.
Let’s get started!
What Does Exchange of Fixed Assets Mean?
The exchange of fixed assets refers to one way of fixed assets disposal where one entity agrees to receive a fixed asset in exchange for another company’s fixed asset. Typically, there are two types of exchange of assets. These are changes for similar assets and dissimilar assets. For the purpose of this article, we cover only the exchange of similar assets.
The accounting for exchange of fixed assets which similar in nature depends on whether the net book value of assets to be given up is more or less than the current market value of the assets to be received. When the net book value of assets given up is higher than the market value of assets to be received, it is considered a loss on exchange. This loss is recorded as an expense and presented in the income statement as a non-operating expense.
In contrast, if the net book value of the assets given up is lower than the current market value of the assets to be received, it is considered as a gain on exchange. This gain shall not be recorded as income and it should not be presented in the income statement. Instead, such gain shall be deducted from the market value of the new assets received.
How to Account for the Exchange of Fixed Assets?
As mentioned above, the exchange of fixed assets may result in gain or loss. The journal entries for gain or loss on the exchange of fixed assets are different.
For loss on the exchange of fixed assets, the company records the new assets received at its market value and derecognize both old assets given up both its cost and the accumulated depreciation.
Below is the journal entry for loss on exchange of fixed assets:
| Account Name | Debit | Credit |
|---|---|---|
| Fixed asset (new) | XXX | |
| Loss on Exchange of fixed assets | XXX | |
| Accumulated depreciation (old) | XXX | |
| Fixed asset (old) | XXX | |
| Cash | XXX | |
| (To record exchange of new asset and cash for the new asset) |
In contrast, if there is a gain on the exchange of assets, such gain shall not be presented in the income statement. The company records the new assets received at its market value less the gain on the exchange or at the amount of cash paid for the new assets plus the net book value of old assets given up and then derecognize the old assets given up from its Balance Sheet.
Below is the journal entry for gain on the exchange of fixed assets:
| Account Name | Debit | Credit |
|---|---|---|
| Fixed asset (new) – equal to cash paid plus NBV of the old asset | XXX | |
| Accumulated depreciation (old) | XXX | |
| Fixed asset (old) | XXX | |
| Cash | XXX | |
| (To record exchange of new asset and cash for the new asset) |
In order to illustrate how to account for this exchange of fixed assets, let’s go through together the examples in the section below.
Example of Loss on Exchange of Fixed Assets
Let’s assume that ABC Co exchanges its old equipment for new equipment with XYZ Co. ABC Co paid in cash for the new equipment at $30,000. The old equipment of ABC Co given up is originally at a cost of $$35,000 and has the accumulated depreciation of $20,000 at the time of exchange. The new equipment to be received has a current market value of $40,000.
From the above example, let’s have a look at the calculation of gain or loss as follow:
| Particular | Amount | Amount |
|---|---|---|
| The market value of new equipment received | $40,000 | |
| Net book value of the asset given up: | ||
| Equipment ($35,000 – $20,000) | $15,000 | |
| Cash | $30,000 | $45,000 |
| Loss on exchange | ($5,000) |
From the extracted calculation, we can record the journal entry for the loss on the exchange of fixed assets as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Equipment (new) | $40,000 | |
| Loss on the exchange of equipment | $5,000 | |
| Accumulated depreciation – Equipment (old) | $20,000 | |
| Equipment (old) | $35,000 | |
| Cash | $30,000 | |
| (To record exchange of new equipment and cash for new equipment) |
Example on Gain on Exchange of Fixed Assets
From the above example, let’s assume that the current market value of the new equipment is $50,000 instead of $40,000. We can calculate the gain on the exchange as follow:
| Particular | Amount | Amount |
|---|---|---|
| The market value of new equipment received | $50,000 | |
| Net book value of asset given up: | ||
| Equipment ($35,000 – $20,000) | $15,000 | |
| Cash | $30,000 | $45,000 |
| Gain on exchange | $5,000 |
As the accounting rule in accordance with the conservatism principle, the gain on the exchange of assets shall not be recorded as income and presented in the income statement. Instead, the value of the new asset shall be recorded at the amount of cash paid for such exchange plus the net book value of old assets given up.
Therefore, we can record the journal entry for the gain on exchange of fixed assets as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Account Name | Debit | Credit |
| Equipment (new) | $45,000 | |
| Accumulated depreciation – Equipment (old) | $20,000 | |
| Equipment (old) | $35,000 | |
| Cash | $30,000 | |
| (To record exchange of new equipment and cash for new equipment) |
The Bottom Line
The accounting for the exchange of fixed assets shall be carried out properly depends on whether there is gain or loss on the exchange of fixed assets. If there is a loss on the exchange, the new assets shall be recorded at their market value. However, if there is a gain on exchange, the new assets shall be recorded at the amount of cash paid for the new assets plus the net book value of old assets given up.
