1. Record the exchange of assets:
Debit: Used Car (New Car's Cost)
Credit: Old Car (Book Value)
*In this entry, the cost of the new car is initially recorded as a debit to the Used Car account, and the book value of the old car is credited.*
2. Recognize gain or loss on trade-in (if applicable):
Debit: Loss on Trade-In (or Credit: Gain on Trade-In)
Credit: Old Car (Accumulated Depreciation)
*If the book value of the old car exceeds the trade-in allowance, a loss is recognized. Conversely, if the trade-in allowance exceeds the book value, a gain is recorded.*
3. Update Accumulated Depreciation and Cash:
Debit: Accumulated Depreciation - Old Car
Credit: Cash (Trade-In Allowance)
*The accumulated depreciation of the old car is debited to remove it from the books, and cash is credited for the trade-in allowance received.*
4. Adjust New Car Basis:
Debit: Used Car (Difference)
Credit: Old Car (Difference)
*If there's a difference between the cost of the new car and the combined book value and trade-in allowance of the old car, it's adjusted by debiting or crediting the Used Car account and crediting or debiting the Old Car account accordingly.*
In summary, the journal entry for a car trade-in involves recognizing the exchange of assets, recording any gain or loss, updating accumulated depreciation and cash, and adjusting the new car's basis to reflect the trade-in transaction.
