Accounting for Asset Exchanges¶

Exchange of Similar Assets¶

When an old asset is exchanged for a new asset that performs the same function (e.g., replacing an old drilling machine with a new one), no gain or loss is recognized at the time of the exchange. The cost of the new asset is determined by the net book value of the old asset plus any cash paid.

Example:

Old Drilling Machine:
- Cost: ₹20 lakhs
- Accumulated Depreciation: ₹15 lakhs
- Net Book Value: ₹5 lakhs
New Drilling Machine:
- List Price: ₹32 lakhs (Irrelevant for accounting)
- Exchange Price: ₹25 lakhs (Plus the old machine)

Accounting Entries:

Remove Old Machine's Cost:
- Credit: Old Drilling Machine ₹20 lakhs
Remove Accumulated Depreciation:
- Debit: Accumulated Depreciation ₹15 lakhs
Record Cash Payment:
- Credit: Cash ₹25 lakhs
Record New Machine's Cost:
- Debit: New Drilling Machine ₹30 lakhs (₹5 lakhs + ₹25 lakhs)

Journal Entry:

Account	Debit (₹)	Credit (₹)
Accumulated Depreciation	15,00,000
Cash		25,00,000
Old Drilling Machine		20,00,000
New Drilling Machine	30,00,000

Explanation: The new machine is recorded at a cost of ₹30 lakhs, which is the net book value of the old machine (₹5 lakhs) plus the cash paid (₹25 lakhs). No gain or loss is recognized.

Exchange of Dissimilar Assets¶

When an old asset is exchanged for a new asset that performs a different function (e.g., exchanging a drilling machine for a packing machine), the exchange is treated as a sale of the old asset and a purchase of the new asset. A gain or loss is recognized based on the difference between the fair value of the asset received and the net book value of the asset given up.