Question

Last year (2016), Sarasota Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company’s accountant to provide him with cost data on the company’s elevator. This information is presented below.:
Old Elevator New Elevator
Purchase price $103,500 $159,000
Estimated salvage value 0 0
Estimated useful life 5 years 4 years
Depreciation method Straight-line Straight-line
Annual operating costs
other than depreciation:
Variable $34,000 $11,000
Fixed 23,900 8,200

Annual revenues are $241,000, and selling and administrative expenses are $30,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Bramble Condos will be able to sell it for $25,900.

Required:
Determine any gain or loss if the old elevator is replaced.

Answer 1

Answer:

$56,900 loss

Explanation:

Calculation to determine any gain or loss if the old elevator is replaced.

First step is to calculate the Book value of old Elevator

Purchase price $103,500

Less: Depreciation expense for the year 2016 (($103,500-0)/5) $ 20,700

Book value of old Elevator $ 82,800

($103,500-$20,700)

Now let calculate any gain or loss if the old elevator is replaced.

Book value of old Elevator $ 82,800

Less: Sold of old Elevator $25,900

Loss on Sales of old Elevator $56,900

Therefore the loss if the old elevator is replaced is $56,900