Question

23. Palm Enterprises trades in a five-year-old tourist bus on a new model. The old bus had an original cost of $37,000, and its current book value is $16,000. Palm pays $23,000 in addition to the trade-in for a new bus having a list price of $40,000. a. Account for this transaction in T-account format. b. Assume now that Palm's accountant believes Palm could have nego- tiated a 5 percent discount on the list price if Palm had not traded in the old bus. Would you account for the transaction differently than in part a? Explain.

Answer 1

Sol:

a.

Fixed asset (Bus) account
particulars	amount	particulars	amount
to Balance c/d	$ 16,000.00
to Cash A/c	$ 23,000.00
to Profit on disposal	$    1,000.00	by balance B/d	$ 40,000.00
	$ 40,000.00		$ 40,000.00

b. Accounting treatment will be different if Palm enterprises negotiated a 5% discount on the list price of $ 40000 and not traded in the old bus. The accounting treatment will be as follows

Fixed asset                         Dr.	$ 40,000.00
To Cash		$        38,000.00
To Discount on purchase		$          2,000.00

that means Palm enterprises will have a benefit of $ 2000 in terms of discount and also the remaining amount is needed to pay in cash or through the bank.