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Erin operates a boutique in Kwun Tong and the following is the 2020 April budgeted income statement that for her store: Sales Cost of goods
Erin operates a boutique in Kwun Tong and the following is the 2020 April budgeted income statement that for her store: Sales Cost of goods soldNote 1) RentNote 2) Salary(No:3) Depreciation Note) Other expenses Net Income 185,000 65,000 35,000 15,000 6,000 8,000 56,000 Note 1 The stocks were purchased from Korea in Feb 2020 for $65,000. The Won has depreciated somewhat against the Hong Kong Dollars in the past few months. Note 2 Erin is renting a shop space with a two-year contract with an agreed monthly rental of HK$35,000. Both landlord and the tenant are not allowed to terminate the contract before its expiry date and subletting is not allowed. Note 3 Erin is employing a shop assistant, Peter, for a monthly salary of $15,000 and Peter might have bonus if his performance is good at the end of 2020. Erin also works as shop manager for the shop, but she is not paying herself anything. Note 4 Erin spent $216,000 on decoration and purchase of furniture and equipment. She expects all these to last for 3 years and uses straight line method to arrive at the depreciation cost per month. (a) Comment on the appropriateness of the amount entered in the above budget statement in terms of economic costs for each of the following: (i) Cost of goods sold (2 marks) (ii) Rent (2 marks) (iii) Salary (2 marks) (iv) Depreciation cost (3 marks) (b) As the rental contact will expire after 8 months, the landlord offers Erin either renewing the rental contact at the current market rental value of $35,000 per month or purchasing the shop space for a market price of $8,000,000. Erin estimates she will have mortgage repayment $28,000 per month for a repayment period of 20 years after paying down payment. Considering the impact of transaction cost, how will the cost of using the shop space differ between the purchase option and the rental renewal option
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