Check My Work (No more tries available) eBook Differential Analysis for a Lease
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Differential Analysis for a Lease or Sell Decision
Inman Construction Company is considering selling excess machinery with a book value of $279,000 (original cost of $400,000 less accumulated depreciation of $121,000) for $276,700, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $284,400 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,700.
a. Prepare a differential analysis, dated January 3, 2014, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
January 3, 2014
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
$
$
$
Costs
Income (Loss)
$
$
$
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Follow Example Exercise 25-1. Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.
Learning Objective 1.
b. On the basis of the data presented, would it be advisable to lease or sell the machinery?
SelectLease the machinerySell the machineryCorrect 1 of Item 2
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Follow Example Exercise 25-1. Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue.
Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.
Learning Objective 1.
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a. Prepare a differential analysis, dated January 3, 2014, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
January 3, 2014
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
$
$
$
Costs
Income (Loss)
$
$
$
Explanation / Answer
There is a incremental benefit of 3165 in selling machine
Particulars Sell Machine Lease Machine Differential effect on income Revenue from selling machine 276700 0 276700 Lease Rentals 0 284400 -284400 Cost of repairs 0 24700 -24700 Brokerage commission 13835 0 13835 Net Income 262865 259700 3165