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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

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000 less a 6% sales commission. Alternatively, Timberlake Company can lease the equipment to another company for five years for a total of $84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23 as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

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 T should sell or lease the machine.

Explanation

Company T has two alternatives to either lease at $84,600 or to sell a machine for $82,000 with a 6% sales commission. The company would generate the revenue of $76,650 from leasing after providing $7,950 for  repair, insurance and tax or the Company T could get $77,080 after selling the machine. This clearly shows an increase in the income by $430 if the Company T sells the machine instead of leasing it.

Working Note:

Calculate the cost to sell the machine...

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