Keating Co.is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date.Keating Co.can sell the equipment through a broker for $25,000 less 5% commission.Alternatively,Gunner Co.has offered to lease the equipment for five years for a total of $48,750.Keating will incur repair,insurance,and property tax expenses estimated at $8,000 over the five-year period.At lease-end,the equipment is expected to have no residual value.The net differential income from the lease alternative is
A) $17,000
B) $7,000
C) $27,000
D) $14,500

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the net differential income for both alternatives.

Option 1: Sell the equipment
Selling price = $25,000 - (5% x $25,000) = $23,750
Book value of equipment = $50,000 - $40,000 = $10,000
Loss on sale = $10,000 - $23,750 = $13,750
Net differential income = Loss on sale - $8,000 = -$21,750

Option 2: Lease the equipment
Lease payments = $48,750
Expenses = $8,000
Net differential income = Lease payments - expenses = $40,750

Therefore, the best choice is to lease the equipment as it generates a positive net differential income of $40,750.