Answered: She wants advice on stopping her…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Requirement: She wants advice on stopping her business to pursue education, as she can't imagine going down both paths simultaneously. If Sky decides to continue with the business, she wants to emphasize ethics as she believes that is the best long-term approach. Any advice on this aspect of business, and her situation specifically, would be appreciated. Sky wants to rent a small retail space for $2,000 a month. Sky expects that her current sales volume would double in 2023 if she went in this direction. With either the online or storefront approach, Sky would need to invest in new machinery which could either be purchased for $10,000 or leased for $200 a month (5 year lease). The machinery is expected to last five years and Sky expects the usage to be pretty consistently annually but there would be higher usage in the summer months. She is wondering what the appropriate accounting and tax treatment for the machinery would be. If Sky were to purchase the machine outright, she could borrow the money from the bank at a 5.75% rate. Her friend Libby has some money saved up and has offered to cover the newsletters, distribution, and funding for the machine in exchange for 30% ownership in the business. Sky is also considering going to college. She understands that at age 19, she has some time before fully committing to a career. She believes she can borrow the $40,000 needed at a low rate and earn $25 an hour after graduating with a 4-year bachelor's degree. After three years, she expects to earn $40 an hour for the rest of her career.

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