At the beginning of last year (2021), Reema Condos installed a mechanized elevator for its tenants. The owner of the company, Reema Joelle, 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 here. Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed Old Elevator New Elevator $120,000 $160,000 5 years Straight-line $35,000 23,000 -0- 4 years Straight-line $10,000 8,500 Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2022, Reema Condos will be able to sell it for $25,000. Instructions a. Determine any gain or loss if the old elevator is replaced. b. Prepare a 4-year summarized income statement for each of the following assumptions: a. NI $539,000 i. The old elevator is retained. ii. The old elevator is replaced. Using incremental analysis, determine if the old elevator should be replaced. a. NI increase $23,000 c. d. Write a memo to Reema Joelle explaining why any gain or loss should be ignored in the decision to replace the old elevator.
At the beginning of last year (2021), Reema Condos installed a mechanized elevator for its tenants. The owner of the company, Reema Joelle, 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 here. Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed Old Elevator New Elevator $120,000 $160,000 5 years Straight-line $35,000 23,000 -0- 4 years Straight-line $10,000 8,500 Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2022, Reema Condos will be able to sell it for $25,000. Instructions a. Determine any gain or loss if the old elevator is replaced. b. Prepare a 4-year summarized income statement for each of the following assumptions: a. NI $539,000 i. The old elevator is retained. ii. The old elevator is replaced. Using incremental analysis, determine if the old elevator should be replaced. a. NI increase $23,000 c. d. Write a memo to Reema Joelle explaining why any gain or loss should be ignored in the decision to replace the old elevator.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:At the beginning of last year (2021), Reema Condos installed a mechanized elevator for its tenants. The
owner of the company, Reema Joelle, 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 here.
Purchase price
Estimated salvage value
Estimated useful life
Depreciation method
Annual operating costs other than depreciation:
Variable
Fixed
Old Elevator New Elevator
$120,000
$160,000
i. The old elevator is retained.
-0-
5 years
Straight-line
$35.000
23,000
-0-
4 years
Straight-line
$10,000
8,500
Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which
elevator is used. If the old elevator is replaced now, at the beginning of 2022, Reema Condos will be able
to sell it for $25,000.
Instructions
a. Determine any gain or loss if the old elevator is replaced.
b. Prepare a 4-year summarized income statement for each of the following assumptions:
a. NI $539,000
ii. The old elevator is replaced.
c. Using incremental analysis, determine if the old elevator should be replaced.
a. Nl increase $23,000
d. Write a memo to Reema Joelle explaining why any gain or loss should be ignored in the decision
to replace the old elevator.
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