Accounting, Payroll & Pension Issues/Accounting trade-in values

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Question
Hi!  I have a small business selling used musical instruments.  I often do even trades (a trumpet for a clarinet,) or partial trades with cash to me or the other party.  I'm not sure how to record the trade, determine the sale price, determine the trade-in value, figure sales tax, etc.  If I pay $100 for a trumpet worth $700 which I would normally sell for $500, but then sell it for $200 plus a trade-in clarinet worth $600, and then sell the clarinet for $400, how would those transactions look? Thanks!  Nathan

Answer
Begin with the question of valuing the transaction. What did you pay for the purchase including cash plus anything else given up in the purchase transaction. That might be another instrument or service provided by you.

In the transaction you described where you paid $100 for a trumpet, if nothing else was given to the seller, then $100 is what you paid; that is the value of the purchase. By your saying you paid $100 for a trumpet worth $700, I see that as you having gotten a good deal on the purchase. It is not your job to see that the seller is paid what the instrument is worth; if the seller is okay with receiving $100 for the used trumpet, then that is okay. At the time your purchase took place the agreed upon value of the transaction was $100

In the transaction described you sold the trumpet in question for $200 plus received a trade-in clarinet worth $600. You received $800 in total for the transaction. You then have a clarinet with a purchase price to you of $600. You had a gain on the sale of the trumpet of $700 ($800 - $100).

If you then sell the clarinet for $400, you then have a $400 loss ($400 - $800).

As you can see, the net of all this is a gain of $300. You recognized $700 - $400 = $300. Or, $400 received on the sale of the clarinet - $100 purchase price
on the purchase of the trumpet.

It is apparent that consideration needs to be given to the "value" assigned to the instrument received when you receive an instrument as trade-in.

If still questions, please ask a follow-up.

Accounting, Payroll & Pension Issues

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Arthur Naman

Expertise

General accounting and bookkeeping questions. Specific questions pertaining to: monthly bookkeeping, preparing financial reports; reconciling accounts.

I cannot answer questions pertaining to pension or retirement planning.

This is not a forum to have homework answered. Please do your own homework.

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30 years' experience doing tax and accounting work

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MPA from Univ. of Texas at Austin, MBA Golden Gate Univ, San Francisco CA

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