Cell Phone Trade In

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#1
TrueTax  
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Let's say a company trades in 35 cell phones for all of its staff for 35 new models. The cell phones traded in are worth $100 each (ebay value) and the cell phones received are worth $900 each (retail price). The cell phone service provider spreads the charges for $900 per phone over 24 months of cell phone bills, but also gives the company a credit of $600 per phone spread over 24 months for the phones traded in (even though their fair market value is only $100 each). If the company cancels the cell phone contract before the 24 months are over, any remaining credits from the $600 trade in credit per phone are forfeited, but the company is still obligated to pay off any remaining balance of the $900 retail price for each phone to the cell phone company (gotcha!).

Does this qualify as a nonmonetary exchange if receipt of the full trade in value is contingent upon fulfilling the cell service contract term, but the purchase of the new phones is not? If it does qualify as a nonmonetary exchange, do we have boot of $300 per phone plus FMV of the old phone of $100 for a total new book value of the new phone of $400? If it is not a nonmonetary exchange, do we have a sale of old phones at a $500 gain and purchase of new ones as a separate transaction? Or do we allocate the trade in credits received between the $100 FMV and the remaining $500 which is treated as a purchase price adjustment to the cell phone service expense?
 

#2
sjrcpa  
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You can no longer do 1031 exchanges of personal property.
 

#3
TrueTax  
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Yes, this is actually not a tax-motivated question. I am trying to determine the proper financial reporting treatment.
 

#4
sjrcpa  
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Personally I'd say it all falls under the de minimis safe harbor and/or is immaterial.
I'd remove the old phones from the books if they're on there. Expense the monthly payments.
 

#5
TrueTax  
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That would be the most convenient and I like the idea, but it does leave an unconditional liability of 35 * $900 = $31,500 off the books. Maybe that could be offset by trade in credits of 35 * $600 = $21,000, but the credit is conditioned on the service contract, unlike the liability.
 

#6
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Why not:

Acquisition --
Debit Equipment Expense $10,500
Debit Contingent Credit Asset $21,000 (maybe a contra-liability would be better to reflect net amount owed?)
Credit Loan Payable $31,500

Monthly payments --
Debit Loan Payable $1,312.50
Credit Contingent Credit Asset $875
Credit Cash $437.50

If cancelled, clear the remaining contingent credit asset basis to an expense or loss.
 


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