Keating Co. is considering disposing of equipment that cost $74,000 and has $51,800 of accumulated depreciation to date. Keating Co. can sell the equipment through a broker for $29,000 less a 5% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $50,000. Keating will incur repair, insurance, and property tax expenses estimated at $12,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential profit or loss from the sell alternative is a

The differential loss for the sell option is -$10,450

Explanation:

The net book value of the equipment =Cost-accumulated depreciation

cost is $74,000

accumulated depreciation is $51,800

net book value =$74,000-$51800

                         =$22,200

Sell option

Sales proceeds                                                     $29,000.00

broker's fees  ($29,000*5%)                                 ($1450.00)

Book value                                                              ($22,200.00)                                                                        

Profit on sell option                                                $ 5,350.00  

Lease option :

Lease rentals                                                           $50,000.00

Repair,insurance and property taxes                    ($12,000.00)

value of the asset                                                   ($22,200.00)

profit on lease option                                               $15,800.00

The differential of loss for the sell option is -$10,450 ($15,800-$5350)

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