Sure-Bilt Construction Company is considering selling excess machinery with a bo

Question

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $283,300 (original cost of $401,300 less accumulated depreciation of $118,000) for $277,600, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $284,100 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,700.

Prepare a differential analysis, dated January 3, 2014, to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery.

Lease Equipment (Alternative 1)

1) Revenues:

2) Costs:

3) Income:

Sell Equipment (Alternative 2)

1) Revenues:

2) Costs:

3) Income:

Differential Effect on Income (Alternative 2)

1) Revenues:

2) Costs:

3) Income:

Explanation / Answer

Ans

Lease Equipment (Alternative 1)
1) Revenues: $284,100
2) Costs:$24,700
3) Income (Loss) : $401,300-$284,100+$24,700=$141,900

Sell Equipment (Alternative 2)
1) Revenues: $277,600
2) Costs:$0
3) Income (Loss) :$118,000

Differential Effect on Income (Alternative 2)
1) Revenues: $9000
2) Costs:$0
3) Income (Loss) : $141,900-$118,000= $23,900

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