What is an asset trade? Well, like trading in your older vehicle for a newer model, an asset trade occurs when a business owner wants to trade up to improved technology and a vendor offers trade-in value for the older equipment.
This can pose an accounting challenge. The main issue with asset exchanges is that they differ fundamentally from ordinary business income. Savvy business owners will want professional accounting advice to properly record these transactions in their companies’ books.
In a cash sale, the gain or loss is the difference between the book value and the money received. When you receive more cash than the book value, it’s a gain; when you receive less, it’s a loss.
In an asset exchange, the relinquished asset has a carrying value on the company’s books, typically its original cost less allowed depreciation calculated up to the exchange date. The gain or loss is the fair value of the received item minus the book value of the relinquished item.
This is the case only when it is a nonmonetary exchange for dissimilar assets, such as trading furniture for computer equipment. When assets are similar, as is the case for most trade-in events, no gain is recognized from the trade.
In these instances, the gain simply reduces the fair value of the received property. The new asset’s book value is equal to the relinquished item’s book value, plus additional cash spent. Gain is not realized until a future date when the received asset is disposed of for cash or dissimilar property.