Last year (2016), Martinez 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 $100,700 $159,210
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 $34,954 $10,403
Fixed 22,180 8,015
Annual revenues are $240,459, and selling and administrative expenses are $28,550, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2014, Richter Condos will be able to sell it for $25,569.
NOTE:
Loss on Replacement of Elevator (54,991)
Required:
a. Prepare a 4-year summarized income statement for each of the following assumptions:
(1) The old elevator is retained.
(2) The old elevator is replaced.