Question 2 The following is the 2020 April budgeted income statement that Peter is planning for his clothing retail shop that he operates: Sales Cost of goods sold (Note 1) Salary expense Depreciation (Note 2) Interest expense Note 3) Other expenses 220,000 100.000 20,000 8,000 500 5,500 86.000 Net Income Note 1 Note 2 The stocks were purchased in Feb 2020 for $100,000. It turns out that the style of the fashion bought was not popular than most people anticipated. The wholesale price decreased by 20% this month. Peter was a smart merchandiser as he managed to make the purchase of the stocks before the increase in wholesale price. Peter spent $288,000 on decoration and purchase of furniture and office equipment such as computers and calculators. He expects all these to last for 3 years (with no scrap value) and uses straight line method to arrive at the depreciation cost per month. Peter has obtained an overdraft credit line of $250,000 from a bank. The interest rate is 12% per annum but he expects to use only $50,000 of the credit in 2010 November. Actually, he does not need to borrow much because he has used $600,000 of his own savings to finance the business. Note 3 (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 (3 marks) ii) Depreciation cost (3 marks) iii) Cost of capital (3 marks) (b) Peter has forgotten to budget rental expenses for the month. Comment on the appropriateness of his treatment under each of the following scenarios: i) Suppose Peter owns the shop space, the property is not mortgaged and Peter budgets a rental expense of zero. (1 mark) ii) Suppose Peter rents the shop space from a landlord and he budgets a rental expense of $40,000. The rental contract, signed in late 2020, covers the period from Jan 2020 to Dec 2021. Peter cannot terminate the contract nor sublet the shop to others during the rental period. The monthly rental is $40,000 and the rent for April has not been paid yet when the budget statement above was drawn up. (2 marks) iii) Suppose Peter owns the shop space and he budgets a rental expense of $60,000 because the property is mortgaged to the bank and his monthly mortgage repayment over a period of 10 years is $60,000 per month. (2 marks) (c) Just suppose that all cost items on Peter's original budget are correct in terms of economic cost. Explain why it might be argued that the "net income" of $86,000 can be treated as a cost rather than a profit for Peter to operate the clothing retail business? (4 marks) (d) There are differences in how economists and accountants calculate costs of Peter's business. Who is right? (3 marks) Question 2 The following is the 2020 April budgeted income statement that Peter is planning for his clothing retail shop that he operates: Sales Cost of goods sold (Note 1) Salary expense Depreciation (Note 2) Interest expense Note 3) Other expenses 220,000 100.000 20,000 8,000 500 5,500 86.000 Net Income Note 1 Note 2 The stocks were purchased in Feb 2020 for $100,000. It turns out that the style of the fashion bought was not popular than most people anticipated. The wholesale price decreased by 20% this month. Peter was a smart merchandiser as he managed to make the purchase of the stocks before the increase in wholesale price. Peter spent $288,000 on decoration and purchase of furniture and office equipment such as computers and calculators. He expects all these to last for 3 years (with no scrap value) and uses straight line method to arrive at the depreciation cost per month. Peter has obtained an overdraft credit line of $250,000 from a bank. The interest rate is 12% per annum but he expects to use only $50,000 of the credit in 2010 November. Actually, he does not need to borrow much because he has used $600,000 of his own savings to finance the business. Note 3 (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 (3 marks) ii) Depreciation cost (3 marks) iii) Cost of capital (3 marks) (b) Peter has forgotten to budget rental expenses for the month. Comment on the appropriateness of his treatment under each of the following scenarios: i) Suppose Peter owns the shop space, the property is not mortgaged and Peter budgets a rental expense of zero. (1 mark) ii) Suppose Peter rents the shop space from a landlord and he budgets a rental expense of $40,000. The rental contract, signed in late 2020, covers the period from Jan 2020 to Dec 2021. Peter cannot terminate the contract nor sublet the shop to others during the rental period. The monthly rental is $40,000 and the rent for April has not been paid yet when the budget statement above was drawn up. (2 marks) iii) Suppose Peter owns the shop space and he budgets a rental expense of $60,000 because the property is mortgaged to the bank and his monthly mortgage repayment over a period of 10 years is $60,000 per month. (2 marks) (c) Just suppose that all cost items on Peter's original budget are correct in terms of economic cost. Explain why it might be argued that the "net income" of $86,000 can be treated as a cost rather than a profit for Peter to operate the clothing retail business? (4 marks) (d) There are differences in how economists and accountants calculate costs of Peter's business. Who is right