Currently, 11 states have legalized marijuana or cannabis for recreational use. Four more states, 1

including Arizona and New Jersey, are voting to legalize and tax recreational marijuana sales recently . The motivation for legalization includes allowing the government to use police resources against more serious crimes, removing illegal drug dealers, raising tax revenue, and treating addiction as a public health issue instead of a criminal issue.

Question 1

a. Taxing legal marijuana sales is attractive at a time when states are looking for ways to increase their

tax revenues. Illinois has collected more than $100 million in recreational marijuana tax revenue

2 since legalizing sales on Jan 1 this year .

Different states have different approaches toward taxing legal marijuana. Some states adopt an approach like a typical sales tax where the consumer pays a tax on the purchase price. For example, in Oregon, a consumer pays a tax of 17% of the purchase price.

Suppose the recreational marijuana market is perfectly competitive. Use a diagram to discuss the impact of the sales tax on marijuana in Oregon. (18%)

b. A major argument for legalization and taxation as a rational solution to illegal marijuana use is that

high tax would discourage users from consuming. Using over 23,000 actual transaction data,

3 economists have found that the price elasticity of demand for marijuana was about 0.70. Interpret

the price elasticity of demand. Is the demand for marijuana price elastic or inelastic? Does it make sense? If the government wants to reduce marijuana consumption by 20%, by how many percent the marijuana price must increase? (8%)

Currently, 11 states have legalized marijuana or cannabis for recreational use. Four more states, 1

including Arizona and New Jersey, are voting to legalize and tax recreational marijuana sales recently . The motivation for legalization includes allowing the government to use police resources against more serious crimes, removing illegal drug dealers, raising tax revenue, and treating addiction as a public health issue instead of a criminal issue.

Question 1

a. Taxing legal marijuana sales is attractive at a time when states are looking for ways to increase their

tax revenues. Illinois has collected more than $100 million in recreational marijuana tax revenue

2 since legalizing sales on Jan 1 this year .

Different states have different approaches toward taxing legal marijuana. Some states adopt an approach like a typical sales tax where the consumer pays a tax on the purchase price. For example, in Oregon, a consumer pays a tax of 17% of the purchase price.

Suppose the recreational marijuana market is perfectly competitive. Use a diagram to discuss the impact of the sales tax on marijuana in Oregon. (18%)

b. A major argument for legalization and taxation as a rational solution to illegal marijuana use is that

high tax would discourage users from consuming. Using over 23,000 actual transaction data,

3 economists have found that the price elasticity of demand for marijuana was about 0.70. Interpret

the price elasticity of demand. Is the demand for marijuana price elastic or inelastic? Does it make sense? If the government wants to reduce marijuana consumption by 20%, by how many percent the marijuana price must increase? (8%)

Wildhorse Co. had net income of $175240 and paid dividends of $40000 to common stockholders and $19000 to preferred stockholders in 2020. Wildhorse Co.’s common stockholders’ equity at the beginning and end of 2020 was $862000 and $1370000, respectively. Wildhorse Co.’s return on common stockholders’ equity was

11.00%.

14.00%.

10.00%.

16.00%.

Sheffield Corp. had net income of $163625 and paid dividends of $48500 to common stockholders and $16500 to preferred stockholders in 2020. Sheffield Corp.’s common stockholders’ equity at the beginning and end of 2020 was $890000 and $1250000, respectively. Sheffield Corp.’s return on common stockholders’ equity was

13.75%.

10.75%.

9.75%.

15.75%.

1. The Cinci Company issues $100,000, 10% bonds at 103 on April 1, 2020. The bonds are dated January 1, 2020 and mature six years from that date. Straight-line amortization is used. Interest is paid annually each December 31. Compute the bond carrying value as of December 31, 2023.

Answer

$_______________

P4-20: Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

The following financial data are also available:

1. The firm has estimated that its sales for 2020 will be $900,000.
2. The firm expects to pay $35,000 in cash dividends in 2020.
3. The firm wishes to maintain a minimum cash balance of $30,000.
4. Accounts receivable represent approximately 18% of annual sales.
5. The firm’s ending inventory will change directly with changes in sales in 2020.
6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.
7. Accounts payable will change directly in response to changes in sales in 2020.
8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
9. Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.

1. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.
2. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.
3. Analyze these statements, and discuss the resulting external financing required.

Please show your work. It does not help me if you just provide the answers.

Other data:

Accrued but unrecorded and uncollected consulting fees earned at December 31 amount to: $27500.

The company determined that $16500 of previously unearned consulting fees had been earned at December 31.

Office supplies on hand at December 31 total $330

The company purchased all of its equipment when it first began business. At that time, the estimated useful life of the equipment was six years.

The company prepaid its nine-month rent agreement on June 1, 2020.

The company prepaid its six-month insurance policy on December 1, 2020

Accrued but unpaid salaries total $13200 at December 31,2020.

On September 1, 2020, the company borrowed $66000 by signing an eight-month, 4 percent note payable. The entire amount, plus interest, is due March 31, 2021.

Account                                                                                 Debit                             Credit

Cash                                                                                       304,150

Accounts Receivable                                                            99,000

Office supplies                                                                            880

Prepaid rent.                                                                           3,960

Unexpired insurance                                                              1,650

Office equipment                                                                  79,200

Accumulated depreciation: office equipment                                                        26,400

Accounts payable                                                                                                           4,400

Notes payable (due 3/1/12)                                                                                       66,000

Interest payable                                                                                                                 660

Income taxes payable                                                                                                    9,900

Dividends payable                                                                                                          3,500

Unearned consulting fees                                                                                           24,200

Capital stock                                                                                                                  220,000

Retained earnings                                                                                                         44,000

Dividends                                                                              3,500

Consulting fees earned                                                                                               550,000

Rent expense                                                                      16,170

Insurance expense                                                               2,420

Office supplies expense                                                      4,950

Depreciation expense: office equipment                      12,100

Salaries expense                                                                363,000

Utilities expense                                                                    5,280

Interest expense                                                                    3,300

Income taxes expense                                                        49,500

Totals                                                                                   949,060                      949,8060

Instructions:

1. Prepare the necessary adjusting journal entries on December 31, 2020. Also prepare an adjusted trial balance dated December 31, 2020 (20 points).
2. From the adjusted trial balance prepared in part a, prepare an income statement and statement of retained earnings for the year ended December 31, 2020. Also prepare the company’s balance sheet dated December 31, 2020 (20 points).
3. Prepare the necessary year-end closing entries (15 points).
4. Prepare an after-closing trial balance (15 points).
5. Compute the company’s average monthly insurance expense for January through November 2020 (5 points).

1. Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

   The following financial data are also available:

   1. The firm has estimated that its sales for 2020 will be $900,000.

   2. The firm expects to pay $35,000 in cash dividends in 2020.

   3. The firm wishes to maintain a minimum cash balance of $30,000.

   4. Accounts receivable represent approximately 18% of annual sales.

   5. The firm’s ending inventory will change directly with changes in sales in 2020.

   6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.

   7. Accounts payable will change directly in response to changes in sales in 2020.

   8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.

   9. Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.

   1. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.

   2. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.

   3. Analyze these statements, and discuss the resulting external financing required.

      Red Queen Restaurants Income Statement for the Year Ended December 31, 2019

      Sales revenue $800,000 Less: Cost of goods sold    600,000       Gross profits $200,000 Less: Operating expenses    100,000       Net profits before taxes $100,000 Less: Taxes (rate = 21%)    21,000       Net profits after taxes $ 79,000 Less: Cash dividends    20,000       To retained earnings $ 59,000

      Red Queen Restaurants Balance Sheet December 31, 2019

      Assets Liabilities and stockholders’ equity Cash $ 32,000 Accounts payable $100,000 Marketable securities 18,000 Taxes payable 20,000 Accounts receivable 150,000 Other current liabilities   5,000 Inventories    100,000      Total current liabilities $125,000      Total current assets $300,000 Long-term debt    200,000 Net fixed assets    350,000      Total liabilities $325,000      Total assets $650,000 Common stock 150,000 Retained earnings    175,000 Total liabilities and stockholders’ equity $650,000

2. LG 5