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Accounting for LawyersProfessor Bradford

December 16, 201412:30 p.m.

Part I: 2 Hours

GENERAL INSTRUCTIONS

The exam has two parts. This is Part I. You must take Part I on your computer using the Exam 4 software.

1. This is a partially open book exam. You may use the Cunningham book, the Bradford book, any handouts or other text that the instructor posted on the Blackboard site or provided to you, and any materials, such as notes or outlines, written and prepared exclusively by you. During the exam, you may not use or possess any other materials, written, digital, or recorded. You may not use or possess a cell phone or any other electronic device other than the calculator provided by the instructor and the computer on which you are taking the exam. You may not consult with or communicate with any other person during the exam. If you have any other books, notes, briefcases, book bags, cell phones, electronic devices, or other items, you must bring them to the front of the room now. You may not keep these items by your side or take any of them to another designated exam room.

2. You must take the exam, and return your answers, in the assigned exam room.

3. Part I of the exam has ten (10) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.

4. You have two hours (2:00) to complete Part I. You must turn in your answers in the designated room. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

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5. Part I of the exam consists of five (5) questions. The recommended time for each question is as follows:

Question 1……………………..…….. 25 MinutesQuestion 2………………..………….. 20 MinutesQuestion 3…………………..……….. 40 MinutesQuestion 4..………………………….. 20 MinutesQuestion 5…………………………… 15 Minutes

Each question will be weighted in accordance with its recommended time.

6. Do not spend all of your time writing. Think about the issues and organize your answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will be penalized, as will merely “dumping” portions of your notes or outline into your answers rather than answering the question posed.

7. If the answer involves a calculation, show your work so I can see how you calculated the answer. If I cannot see how you calculated the answer, you will not receive full credit.

8. If you believe that additional facts are needed to answer a question, state exactly what those facts are and how they would affect your answer. If you believe that a question is ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your answer.

9. The Honor Code is in effect.

EXAM 4 INSTRUCTIONS

10. You must take the exam on a computer that has the latest version of the Exam 4 software installed. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately. You must take Part I of the exam in the OPEN MODE.

11. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social

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security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”

12. Do not worry about headers, footers, page numbers, or double-spacing your exam; the software does all that for you when the exam is printed.

13. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see Vicki Lill in the Dean’s office immediately. After successfully submitting your exam, exit Exam 4 before leaving the classroom.

14. If you have any technical problems during the exam, please report them immediately to the Dean’s office; we will assume you had no technical problems until you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

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Question 1(25 Minutes)

You are the attorney for Susan Smith, the plaintiff in a personal injury case.

The Settlement Offer

The defendant has made a settlement offer to Susan. Under the terms of the offer, the defendant would pay Susan ten payments of $7,000 each, plus a final payment of $50,000. The first payment of $7,000 would be made immediately and the nine additional $7,000 payments would be made on the same date each year for the nine following years. The final payment of $50,000 would be made exactly 15 years from today.

Taking the Case to Trial

The alternative is to take the case to trial, which should take three years. You expect the litigation expenses and attorneys’ fees to total to $10,000 a year for each of those three years. (To simplify your calculations, assume Susan has to pay those costs in a single lump sum at the end of each of the three years.) At the end of the third year, you expect a judgment of $135,000. That $135,000 figure includes reimbursement for Susan’s expenses and attorneys’ fees. (To simplify your calculations, assume the defendant will pay that amount immediately, at the end of the third year.)

Discuss which of the two options—the settlement or trying the case—offers a higher present value to Susan. Use a discount rate of 4%. (Assume the amounts given are absolutely certain and ignore any differences in risk. Susan will take any differences in the risk of the two options into account after she compares the two present values.)

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Question 2(20 Minutes)

Mountain Cannery cans peas for sale to discount grocery stores. It recently purchased a packaging machine that puts cans into cardboard boxes for shipment.

Mountain paid $17,500 for the packaging machine. It cost Mountain another $600 to ship the machine to Mountain’s cannery, and $400 to modify the machine to fit the cans used by Mountain. Mountain expects to pay $500 each year for oil and routine maintenance on the machine.

The manufacturer guarantees that the machine will last for at least ten years, but Mountain plans to get rid of it after five years, because packaging machines are less efficient as they get older. After five years, when Mountain is finished using the machine, Mountain expects to sell it to a smaller company for approximately $4,500.

Mountain uses the double-declining-balance method of depreciation. Calculate the annual (not monthly) depreciation expense for the packaging machine for each of its five years of use. (Assume that Mountain begins to use the machine on the first day of its fiscal year. In other words, there won’t be any partial years.) Round each year’s depreciation to the closest dollar. Be sure to explain what you’re doing and show your work.

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Question 3(40 Minutes)

You are an associate in the law firm Dewey, Cheatham, and Howe. Larry Lawyer, a partner in the firm, recently received the following audit inquiry from Acme Corporation, one of the firm’s clients:

In connection with an audit of our financial statements as of November 30, 2014, and for the fiscal year then ended, management of Acme Corporation has prepared, and furnished to our auditors, Nerd and Geek, 741 Numbers Plaza, Lincoln, NE 68583, a description and evaluation of certain contingencies, including those set forth below, involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of Acme in the form of legal consultation or representation. These contingencies are regarded by management of Acme as material for this purpose. Your response should include matters that existed at November 30, 2014, and during the period from that date to the date of your response.

Please furnish to our auditors an evaluation of the following:

1. Possible liability arising out of an accident producing an alleged injury to Samuel Smith on or about March 7, 2014, in Bellevue, Nebraska.

2. Possible liability on a contract dated December 21, 2012, pursuant to which Acme guaranteed certain debt owed by Beta Corporation to First State Bank of York, Nebraska.

3. Any other pending or threatened litigation, claims, and assessments, whether or not asserted, or a statement that the matter identified above is the only such litigation, claim, or assessment of which you are aware.

Please specifically identify the nature of and reasons for any limitation on your response.

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/s/ Paul PrezCEO, Acme Corporation

Larry has provided the following information about the firm’s representation of Acme.

1. Accident involving Samuel Smith

This refers to an accident in which a truck owned by Acme hit and injured a pedestrian, Samuel Smith. Acme has retained us to represent it regarding this accident. Smith has hired an attorney, who has called and asked if Acme is interested in settling; if not, the attorney says he will sue and we’re sure he will follow through.

It’s not clear whether Smith or Acme’s driver is at fault in the accident. Smith’s attorney has provided us with copies of Smith’s medical bills; the total is $130,000. Smith will also sue for damages for pain and suffering if the matter does not settle.

2. First State Bank Guaranty

This refers to a three-party transaction involving Acme, Beta, and the First State Bank of York. Acme guaranteed a loan First State Bank made to Beta. The total amount of the loan was $300,000, but Acme’s guaranty is limited to a maximum of $150,000, without any liability for interest or attorneys’ fees.

Beta has filed for bankruptcy and it is fairly certain that Beta will be unable to repay much of the loan’s principal, if any. If Beta can’t pay, Acme is clearly liable. It has no defense. We are representing Acme in this matter.

3. Other Representation

We are representing Acme in one other matter that is not mentioned in the audit letter. Two weeks ago, Acme discovered that chemicals were leaking from its factory

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into the groundwater. Acme fixed the problem, but not until the groundwater was contaminated. No one is aware of the problem yet, but the water is regularly tested. It is almost certain that the contamination will be discovered and traced back to Acme.

Once the discharge is discovered, it is inevitable that Acme will be sued. Acme will be strictly liable for any damages, and will also have to pay a fine. Acme has no defense. I don’t know exactly how much this will cost Acme, but I’m absolutely sure the total will be between $1 million and $2 million.

Discuss how the law firm should respond to the audit inquiry. You don’t have to draft the actual response letter; just discuss what the response should say and why. Assume that any amounts involved are material to Acme.

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Question 4(20 Minutes)

Big Bank has been asked to loan a substantial amount of money to Borrower Corporation, a large public company that manufactures paper products. Big Bank will consider a great deal of information about Borrower in deciding whether to make the loan; it will not base its decision solely on Borrower’s financial statements. However, the information in Borrower’s financial statements will be part of what Big Bank considers.

Which three of the financial ratios we studied in this course should be most important to Big Bank in evaluating whether to lend the money to Borrower? Explain what each of the three ratios measures, how it is calculated, and why you think it’s important. Do not discuss more than three ratios; if you do, you will lose points.

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Question 5(15 Minutes)

Discuss the relative costs and benefits of cash versus accrual accounting.

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Accounting for LawyersProfessor Bradford

December 16, 201412:30 p.m.

Part II: 2 Hours

GENERAL INSTRUCTIONS

The exam has two parts. This is Part II. You must answer Part II IN GREEN BOOKS OR ON LINED NOTEBOOK PAPER. During this part of the exam, YOU MAY NOT USE OR POSSESS YOUR COMPUTER or any other electronic device other than the calculator provided by the instructor. No other calculator is permitted.

1. This is a partially open book exam. You may use the Cunningham book, the Bradford book, any handouts or other text that the instructor posted on the Blackboard site or provided to you, and any materials, such as notes or outlines, written and prepared exclusively by you. During the exam, you may not use or possess any other materials, written, digital, or recorded. You may not use or possess a cell phone or any other electronic device other than the calculator provided by the instructor. You may not use your computer during Part II of the exam. You may not consult with or communicate with any other person during the exam. If you have any other books, notes, briefcases, book bags, cell phones, electronic devices, or other items, you must bring them to the front of the room now. You may not keep these items by your side or take any of them to another designated exam room.

2. You must take the exam, and return your answers, in the assigned exam room.

3. Part II of the exam has six (6) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.

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4. Part II of the exam consists of a single question. You have two hours (2:00) to complete Part II. You must turn in your answers in this room. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

5. Do not spend all of your time writing. Think about the issues and organize your answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will be penalized, as will merely “dumping” portions of your notes or outline into your answers rather than answering the question posed.

6. Write legibly. I can’t give you credit for what I can’t read.

7. If the answer involves a calculation, show your work so I can see how you calculated the answer. If I cannot see how you calculated the answer, you will not receive full credit.

8. If you believe that additional facts are needed to answer a question, state exactly what those facts are and how they would affect your answer. If you believe that a question is ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your answer.

9. Part II of the exam must be answered in bluebooks or on lined notebook paper. Please write on only one side of each page. BE SURE TO WRITE YOUR EXAM IDENTIFICATION NUMBER ON EACH BLUE BOOK OR PIECE OF PAPER THAT YOU USE. If you are not using bluebooks, please staple your pages together in order. Do not put your name on any materials you turn in.

10. The Honor Code is in effect.

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Question (2 Hours)

National Nail Corporation is a small business that buys roofing nails from manufacturers for resale to roofing contractors. National Nail has two employees: Nora National, its founder and principal shareholder; and Carl Clerk, who does bookkeeping and clerical work on a part-time basis.

National Nail’s balance sheet as of Oct. 31, 2014 appears on p. 6 below.

Using the following information,

Prepare National Nail Corporation’s accounting journal entries for November, including any necessary closing and adjusting entries.

Post those journal entries to t-accounts. (Don’t forget to begin by posting the beginning balances for the start of the month from the Oct. 31, 2014 balance sheet.)

Prepare a balance sheet for National Nail Corporation as of Nov. 30, 2014.

Prepare an income statement for National Nail Corporation for the month of November 2014.

Useful Information

Inventory.o National Nail uses the periodic method of

accounting for inventory and uses the LIFO method to value that inventory.

o The $440 in inventory listed on National Nail’s Oct. 31 balance sheet consisted of 540 pounds of nails, acquired on the following dates:

Aug. 15: 140 pounds, for a total price of $100 Sept. 10: 300 pounds, for a total price of $240 Oct. 20: 100 pounds, for a total price of $100

o At the end of November, National Nail had 300 pounds of nails remaining in its inventory.

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o Assume that the lower-of-cost-or-market rule does not apply.

Income Taxes. At the end of the tax year, National Nail must pay a flat 10% income tax on any income.

Stock. National Nail’s common stock has a par value of 50 cents ($0.50) per share. It is not traded on any stock exchange.

Allowance for Doubtful Accounts. Don’t worry about Bad Debt Expense or an Allowance for Doubtful Accounts. Assume that 100% of the Accounts Receivable will be paid.

National Nail Corporation’s November Transactions

Date Transaction

Nov. 1 Received $600 from Jones Contractors, in complete repayment of the $580 principal and $20 interest due on a note Jones gave for nails purchased several months ago.

Nov. 1 Sold 50 pounds of nails to Roof City for $100 cash. Roof City picked up and paid for the nails the same day.

Nov. 2 Received $400 cash from Smith Roofing for nails delivered to Smith last month.

Nov. 4 Paid $20 owed on account to Express Delivery for a charge to ship nails to a customer last month.

Nov. 5 Sold 1,000 shares of common stock to Berkshire Hathaway for $1,500 cash.

Nov. 7 Received 200 pounds of nails from Nails ‘R Us. Paid $150 cash for the nails.

Nov. 12 Sold and delivered 300 pounds of nails to Giant Construction for a price of $500. Giant agreed to pay for the nails in 30 days.

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Nov. 16 Sold and delivered 100 pounds of nails to Roe Roofing for a price of $250, which Roe has not yet paid.

Nov. 18 Bought 400 pounds of nails from Nails, Inc. for a total price of $350 cash. Nails were delivered that same day.

Nov. 20 Declared, but did not immediately pay, a cash dividend totaling $4,000 for all shares.

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Date Transaction

Nov. 21 Delivered 150 pounds of nails to Sam’s Contracting and received $350 cash in full payment.

Nov. 23 Delivered 50 pounds of nails to Abby’s Roofing. Abby’s prepaid the full $120 price for these nails in October, and owes nothing more.

Nov. 25 Paid the $4,000 cash dividend declared on Nov. 20.

Nov. 26 Sold and delivered 250 pounds of nails to Fred’s, Inc., for a price of $700. Fred’s has not yet paid.

Nov. 27 Purchased 200 pounds of nails from Metalworks Corporation. Paid the $75 price and received the nails on the same day.

Nov. 28 Sold 100 pounds of nails to Roger’s Roofing for $220 cash. Roger paid for and picked up the nails on the same day.

Nov. 28 Ordered 500 pounds of nails from Big Nails, Inc. for a price of $350, payable on delivery. Big Nails has not yet delivered the nails.

Nov. 29 Paid $100 to Cellular, Inc. for business cellphone service. The payment covers both November and December; National paid for two months to get a discount.

Nov. 29 Samuel Roofing ordered 70 pounds of nails and paid $120 cash. Have not yet delivered the nails to Samuel.

Nov. 30 Paid Larry Landlord $200 for the November rent for National Nail’s office.

Nov. 30 Received the November utility bill in the amount of $60. Have not yet paid.

Nov. 30 Paid Nora National $300 cash for her November salary.

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Nov. 30 Totaled the hours worked by Carl Clerk during November and determined that National owes Carl $200. Have not yet paid him.

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National Nail CorporationBalance Sheet

As of October 31, 2014

AssetsCash $ 6,820Accounts Receivable 2,310Note Receivable 580Inventory 440Accrued Interest Receivable 20

TOTAL ASSETS $ 10,170

Liabilities and Shareholders' EquityLiabilities

Accounts Payable $ 250Deferred Sales Revenue 230Income Taxes Payable 490

Shareholders' EquityCommon Stock 2,000Additional Paid-In Capital 3,000Retained Earnings 4,200

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,170