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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Lease or sell

Duncan Company owns a machine with a cost of $75,000 and accumulated depreciation of $15,000 that can be sold for $54,000 less a 5% sales commission. Alternatively, Duncan Company can lease the machine to another company for three years for a total of $60,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Duncan Company on the machine would total $8,500 over the three years. Prepare a differential analysis on February 21 as to whether Duncan Company should lease (Alternative 1) or sell (Alternative 2) the machine.

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Determine: Whether Company D should sell or lease the machine.

Explanation

Company D has two alternatives to either lease at $60,000 or to sell a machine for $54,000 with a 5% sales commission. The company would generate the revenue of $51,500 from leasing after providing $8,500 for repair, insurance and tax or the Company D could get $51,300 after selling the machine. This clearly shows an increase in the income by $200 if the Company D leases the machine instead of selling it.

Working Note:

Calculate the cost to sell the machine...

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