Problem 20-4A (Part Level Submission) Last year (2013), Richter Condos installed

Question

Problem 20-4A (Part Level Submission) Last year (2013), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company's accountant to provide him with cost data on the company's elevator. This information is presented below. Old Elevator New Elevator Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: $95,700 0 5 years $160,696 4 years Variable Fixed 34,828 23,261 9,330 8,962 Annual revenues are $240,693, and selling and administrative expenses are $29,344, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2014, Richter Condos will be able to sell it for $24,149. Determine any gain or loss if the old elevator is replaced. Click if you would like to Show Work for this question: LINK TO TEXT Attempts: O of 3 used SAVE FOR LATER SUBMIT ANSWER

Explanation / Answer

Answer 1 Depreciation of old elevator using straight line method = (Cost - salvage value)/useful life Depreciation of old elevator using straight line method = (95700 - 0)/5 = $19140 Hence net book value of old elevator at the beginning of 2014 = $95700 - $19140 = $75560 Sale value of old elevator = $24149 Loss on sale if old elevator is repalced = $75560 - $24149 = $51411 Answer 2 The old elevator is retained 4 year summarised Income statement Year 1 Year 2 Year 3 Year 4 Total Sales 240693 240693 240693 240693 962772 Less : Costs - Variable cost 34828 34828 34828 34828 139312 - Fixed cost 23261 23261 23261 23261 93044 - Selling & Admin cost 29344 29344 29344 29344 117376 - Depreciation 19140 19140 19140 19140 76560 Total Cost 106573 106573 106573 106573 426292 Net Income 134120 134120 134120 134120 536480 Depreciation of New elevator using straight line method = (160696 - 0)/4 = $40174 The old elevator is replaced 4 year summarised Income statement Year 1 Year 2 Year 3 Year 4 Total Sales 240693 240693 240693 240693 962772 Less : Costs - Variable cost 9330 9330 9330 9330 37320 - Fixed cost 8962 8962 8962 8962 35848 - Selling & Admin cost 29344 29344 29344 29344 117376 - Depreciation 40174 40174 40174 40174 160696 - Loss on sale of asset 51411 0 0 0 51411 Total Cost 139221 87810 87810 87810 402651 Net Income 101472 152883 152883 152883 560121

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