Question

Keating Co. is considering disposing of equipment that cost $74,000 and has $51,800 of accumulated depreciation to date. Keating Co. can sell the equipment through a broker for $29,000 less a 5% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $50,000. Keating will incur repair, insurance, and property tax expenses estimated at $12,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential profit or loss from the sell alternative is a

Answer 1

The differential loss for the sell option is -$10,450

Step-by-step explanation:

The net book value of the equipment =Cost-accumulated depreciation

cost is $74,000

accumulated depreciation is $51,800

net book value =$74,000-$51800

=$22,200

Sell option

Sales proceeds $29,000.00

broker's fees ($29,000*5%) ($1450.00)

Book value ($22,200.00)

Profit on sell option $ 5,350.00

Lease option :

Lease rentals $50,000.00

Repair,insurance and property taxes ($12,000.00)

value of the asset ($22,200.00)

profit on lease option $15,800.00

The differential of loss for the sell option is -$10,450 ($15,800-$5350)