Keating Co. is considering disposing of equipment with a cost of $50,000 and accumulated depreciation of $40,000. Keating Co. can sell the equipment through a broker for $25,000, less a 5% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is
A) $17,000
B) $7,000
C) $27,000
D) $14,500

Question

Quizplus · Accepted Answer

The net differential income from the lease alternative is $17,000. This is calculated as follows:Lease alternative:Total lease payments: $48,750Less: Repair, insurance, and property tax expenses: $8,000Net lease income: $40,750Sale alternative:Selling price: $25,000Less: Broker commission (5%): $1,250Net proceeds from sale: $23,750Net differential income: $40,750 - $23,750 = $17,000