Your company is deciding between leasing or selling an older piece of equipment. Information related to the decision is provided below: Leasing the Equipment Book value: $82,000 Remaining useful life: 5 years Annual leasing revenue: $10,000 Expected annual repairs: $2,000 Legal fees: $1,000 Advertising fees: $500 Selling the Equipment Selling price: $21,000 Legal fees: $1,000 Advertising fees: $500 What is the differential profitability of leasing the equipment?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Your company is deciding between leasing or selling an older piece of equipment. Information related to the decision is provided below:
Leasing the Equipment
- Book value: $82,000
- Remaining useful life: 5 years
- Annual leasing revenue: $10,000
- Expected annual repairs: $2,000
- Legal fees: $1,000
- Advertising fees: $500
Selling the Equipment
- Selling price: $21,000
- Legal fees: $1,000
- Advertising fees: $500
What is the differential profitability of leasing the equipment?
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