Question

O’Callaghan Inc. (OI) is in the highway construction business. OI’s property, plant, and equipment account includes heavy construction equipment. The following transactions relate to the disposal of two of the company’s pieces of equipment.

Equipment One—OI decided to dispose of one of its pieces of heavy machinery and replace it with a newer, more efficient model. OI received $130,000 cash on the sale of the machine. At the date of the sale, the machine had a net book value of $61,000. The original cost of the equipment was $510,000.

Equipment Two—OI recognizes the earth scoop separately from the rest of the piece of equipment, since it is a significant part that needs replacing. The scoop was replaced this year at a cost of $205,000. The scoop was depreciated separately. The net book value of the scoop at the date of replacement was $26,000. Its original cost was $111,000.

Answer 1

1	Equipment One		$
	Bank/Cash Account	Dr	130000
	Equipment One Account	Cr	61000
	Profit on Sale of Machinery	Cr	69000
	(Being Equipment one sold at $ 130000 and
	the difference of book value and cash transferred
	to Profit on sale of Machinery A/c.)
2	Equipment Two		$
	Equipment Two Account	Dr	205000
	Equipment Two Account	Cr	26000
	Bank/Cash Account	Cr	179000
	(Being replacement of old earth scoop with new one)