Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000, less a 6% sales commission. Alternatively, the equipment can be leased by Timberlake Company for five years for a total of $84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23, 2014, as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) 

the equipment.

Answer:

Differential Analysis 

Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2) 

March 23, 2014 

Lease 

Equipment 

(Alternative 1) 

Revenues $84,600 $82,000 –$2,600 

Costs –7,950 –4,920* 3,030 

Income (Loss) $76,650 $77,080 $   430 

    

* $82,000 × 6% 

Timberlake Company should sell the equipment.