USA Capitalize a vehicle purchase

[tayket1285]

Hi All,

Our company just bought a car but I'm not sure how to capitalize it. The cost of the new car is $54k that includes $14k of trade in value of an old car. When I capitalize this new car, do I capitalize $54k or just $40k. I'm not sure if I need to capitalize $14k of a trade-in car. Thanks for your help

 

[Triest123]

You need to capitalize $54k for the new car. The trade in value of $14K is considered as "the sale proceeds" of the old car, which determine the gain / loss on disposal of the old car and reduce the actual payment (i.e. $54K) of the new car.

 

[tayket1285]

I forgot to ask. If the finance amount is $30k and the finance charge is $5k for the total payments to be $35k, do I capitalize the whole $35k or just $30k? I have just realized that if I try to capitalize $35k by debiting asset for $35k and crediting liability for ....$35k, my loan liability does not match with the loan amount of $30k. Thanks for your help

 

[Scramble!]

You would capitalize the $30k (principal and interest). Upon each payment, you will credit cash and debit both interest expense and note payable. For example:

Assume the old car cost $50,000 originally and has accumulated depreciation of $45,000, and the note is payable in 12 monthly installments.

For the trade-in:
DR Cash 14,000
DR Accumulated Depreciation 45,000
CR Old Car 50,000
CR Gain on Vehicle Trade-in 9,000

Purchase of the new car:
DR New Car 54,000
CR Note Payable 30,000
CR Cash 24,000

Each payment:
DR Note payable 2,500
DR Interest Expense 416.67
CR Cash 2,916.67