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16 May, 15:54

Keating Co. is considering disposing of equipment with a cost of $72,000 and accumulated depreciation of $50,400. Keating Co. can sell the equipment through a broker for $26,000 less 10% commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,000. 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. $24,900

b. $19,920

c. $16,600

d. $11,620

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  1. 16 May, 16:00
    0
    Option (c) : $16,600

    Explanation:

    As per the data given in the question,

    For computing the net differential income we need to do following calculations which are shown below:

    Sales consideration = $26,000

    Commission = $26,000*10%

    = $2,600

    Net income = $26,000 - $2,600

    = $23,400

    Lease amount = $48,000

    Repair, insurance, and property tax expenses = $8,000

    Net income = $48,000 - $8,000

    = $40,000

    Income if offer of lease accepted = $40,000

    Income if equipment is sold through a broker = $23,400

    Net differential income from the lease alternative = $40,000 - $23,400

    = $16,600

    Hence, option (c) : $16,600 is correct answer.
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