Assume that Vivid Co.is considering disposing of equipment that cost $350,000 and has $280,000 of accumulated depreciation to date.Vivid Co.can sell the equipment through a broker for $135,000 less 5% commission.Alternatively, Comet Co.has offered to lease the equipment for five years for a total of $235,000.Vivid will incur repair, insurance, and property tax expenses estimated at $60,000.At lease-end, the equipment is expected to have no residual value.The net differential income from the lease alternative is:
A) $135,000.
B) $235,000.
C) $100,000.
D) $46,750.

Question

Quizplus · Accepted Answer

The net differential income from the lease alternative is calculated by taking the total lease income of $235,000, subtracting the expenses of $60,000, and then subtracting the net amount from selling the equipment (sale price minus commission and minus any net book value). The sale through a broker would net $135,000 - 5% of $135,000 = $128,250. The equipment's book value is $350,000 - $280,000 = $70,000. So, the gain from selling would be $128,250 - $70,000 = $58,250. The differential income from leasing instead of selling is $235,000 (lease income) - $60,000 (expenses) - $58,250 (net gain if sold) = $116,750. However, the correct calculation should consider the net income from leasing ($235,000 - $60,000 = $175,000) against the net amount from selling after commission ($128,250), not subtracting the book value again since it's a comparison of alternatives, not a gain calculation. Thus, the correct approach is to directly compare the net lease income ($175,000) with the net sale proceeds ($128,250), which was not accurately reflected in the provided options, indicating a mistake in the explanation process.

Assume That Vivid Co