Thursday, August 6, 2009

Current Asset Example

Accounting Problem:

A car dealer, who sells both new and used cars, has demo cars available that are primarily used for test drives by potential customers. These are used for more than one year and then sold as used by the car dealer.

Does the sale of a demonstration car represent the sale of a non-current asset, or the sale of an item of inventory?

Accounting Answer:

The use of the demonstration cars extends into the next accounting and therefore it is not a current asset because they are not intended for sale in the current period. They are not current assets and not part of working capital of the car dealership. The best accounting decision would be to capitalize the cars and depreciate them as you would in any business that uses cars.

The major distinction here is between capital and revenue items.It also shows that this is not a current asset used by the company.

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