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Accounting for LawyersProfessor BradfordDecember 6, 2016

Part I: 1 Hour and 30 Minutes

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 nine (9) 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 one hour and thirty minutes (1:30) 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 four (4) questions. The recommended time for each question is as follows:

Question 1……………………..…….. 15 MinutesQuestion 2………………..………….. 15 MinutesQuestion 3…………………..……….. 15 MinutesQuestion 4..………………………….. 40 Minutes

An additional 5 minutes is not allocated to any particular question. 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 Part I of 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 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 if there’s a problem with Exam 4. (Regular notebook paper is O.K.)

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Question One(15 Minutes)

The following financial statements for Beta Corporation appear on pp. 5-6 below: (1) Beta’s balance sheet as of December 31, 2015; (2) Beta’s income statement for the year 2015; and (3) Beta’s statement of cash flows for the year 2015.

A. Using these financial statements, calculate Beta’s interest coverage ratio for 2015.

B. Using these financial statements, calculate Beta’s cash interest coverage ratio for 2015.

C. Briefly explain which of these two ratios would be better to use if you were a lender considering making a loan to Beta.

Beta CorporationBalance Sheet

As of December 31, 2015

Assets Liabilities and Shareholders' Equity

Cash $ 184,000 LiabilitiesAccounts Receivable 19,000 Accounts Payable $ 8,000 Inventory 130,000 Short-Term Debt 14,000 Equipment 226,000 Long-Term Debt 425,000 Building 190,000 Land 150,000 Shareholders' Equity

Capital Stock 14,000 Additional Paid-In Capital 80,000 Retained Earnings 358,000

Total Assets $ 899,000 Total Liabilities and Shareholders' Equity $ 899,000

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Beta CorporationIncome Statement

For the Year Ended December 31, 2015

RevenuesSales $ 215,000 Interest 1,000

TOTAL REVENUES $ 216,000

ExpensesCost of Goods Sold $ 30,000 Depreciation 24,000 Interest 27,000 Misc. 12,000

TOTAL EXPENSES 93,000

Net Income Before Income Taxes 123,000 Less: Income Taxes (16,000)

NET INCOME $ 107,000

Beta CorporationStatement of Cash Flows

For the Year Ended December 31, 2015

Cash Flow from Operating Activities $ 81,000

Cash Flow from Investing Activities 12,500

Cash Flow from Financing Activities 3,500

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NET INCREASE IN CASH $ 97,000

Question Two(15 Minutes)

You represent Molly Money, a wealthy investor. Molly owns a startup company that has developed and patented a valuable new method for manufacturing computer chips. Apple, Inc. has offered to buy Molly’s company and you are helping Molly negotiate the deal.

The negotiations are nearing completion and Apple has offered Molly two alternatives:

Alternative 1: Apple would pay Molly $10 million now and $3 million a year for ten years, beginning one year from now.

Alternative 2: Apple would pay Molly nothing now and a lump sum of $45 million five years from now.

Molly is wealthy enough that she has no need for cash, so she doesn’t mind waiting for the money. But she does want to choose the better deal.

Assume that Molly’s discount rate is 5% and that there is absolutely no risk that Apple won’t make the payments. Calculate the present value of each of the two alternatives to help Molly choose between them.

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Question Three(15 Minutes)

Alpha Limited Partnership is a new startup company. On January 1, 2016, Alpha purchased a new machine for its business. The price of the machine was $170,000. It cost Alpha another $5,000 to ship the machine to its factory and $5,000 to install the machine. Regular maintenance and oil for the machine will cost Alpha $3,000 a year.

Alpha expects to use the machine for six years (2016-2021), then replace it with a new one. The old machine will still be useable at that point, so Alpha plans to sell it; it estimates the sales price will be approximately $75,000.

Alpha will use the double-declining-balance method to depreciate the machine. Prepare a schedule showing the depreciation expense for the machine for each of the six years (on an annual, not a monthly, basis). You can round each year’s expense to the nearest dollar.

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Question Four(40 Minutes)

You are an associate in the law firm Penn & Teller. The firm recently received an audit inquiry letter from one of its clients, Vega, Inc. Vega’s letter asks Penn & Teller to provide information to Vega’s outside auditor about any loss contingencies the firm is aware of. The letter does not mention any specific legal matters, but Penn & Teller is currently representing Vega on only two matters:

1. Vega is the defendant in a breach of contract action brought by Blackstone Corporation. This action was filed on December 15, 2015. Discovery has been completed and Blackstone has moved for summary judgment. The contract provides for liquidated damages of $10 million and Vega has no viable defense. Parker Penn, the firm lawyer handling the case, says it is “almost certain” Vega will lose and have to pay the $10 million.

2. Vega is the defendant in a civil antitrust action filed by John Szeles on March 1, 2016. The complaint alleges that Vega engaged in illegal anti-competitive practices and seeks $50 million in damages. The parties are currently engaged in discovery. William Teller, the firm lawyer handling the case, has sent you a memo indicating that there is “roughly an 80% chance” Vega will lose. According to Teller, if Vega loses, the total damages will be in the $15-25 million range. Teller is “absolutely certain” the damages would be somewhere in that range, but “almost anything between $15 and $25 million is possible.”

Discuss how Penn & Teller should respond to the audit inquiry.

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Accounting for Lawyers

Professor BradfordDecember 6, 2016

Part II: One Hours and 45 Minutes

GENERAL INSTRUCTIONS

The exam has two parts. This is Part II. You must answer Part II IN GREEN BOOKS OR ON LINED NOTEBOOK PAPER.

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.

4. Part II of the exam consists of a single question. You have one hour and forty-five minutes (1:45) to complete Part II. You must turn in your answers in this room. If you finish more

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than five minutes early, you may turn in your answers in the Dean’s Office.

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

6. 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.

7. 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.

8. 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.

9. The Honor Code is in effect.

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Question (1 Hour and 45 Minutes)

Pop-Pop, Inc. sells plastic bubble wrap. Pop-Pop buys the bubble wrap in 1,000-yard rolls from a manufacturer in the Philippines and sells it by the yard to small retail stores in the United States. Pop-Pop’s balance sheet as of October 31, 2016 appears on p. 6 below.

Using the following information,

Prepare Pop-Pop’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 October 31, 2016 balance sheet. Do that now so you don’t forget.)

Prepare a balance sheet for Pop-Pop as of November 30, 2016.

Prepare an income statement for Pop-Pop for the month of November, 2016.

Be sure to show any calculations you have to do.

Useful Information

Income Taxes. Pop-Pop must pay a flat 10% income tax on any income. The taxes for 2016 are not due until April, 2017.

Stock. The par value of Pop-Pop’s common stock is $0.50 per share. As of October 31, Pop-Pop had 2,000 shares outstanding. Pop-Pop’s stock is not traded on a stock exchange or any other public market.

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.

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Rent. Pop-Pop rents its office space for $500 a month, including utilities. On October 1, 2016, it paid all of its rent for the rest of the year, a total of $1,500.

Inventory Methods. Pop-Pop uses the FIFO method to value its inventory. It uses the periodic inventory system. Assume that the lower-of-cost-or-market rule does not apply; the “market value” exceeds the cost of the inventory.

Oct. 31 Inventory Valuation. The Inventory listed on Pop-Pop’s October 31 balance sheet was purchased in the following transactions:

o Aug. 15. 100 yds. for $200 ($2.00/yd.)o Sept. 5. 1,000 yds. for $1,500 ($1.50/yd.)o Oct. 10. 1,000 yds. for $1,000 ($1.00/yd.)

Pop-Pop’s November Transactions

Date Transaction

Nov. 2 Pop-Pop delivered 500 yards of bubble wrap to Bill Sharman. Sharman paid the total price of $2,000 in cash upon delivery.

Nov. 3 Pop-Pop delivered 300 yards of bubble wrap to Gerald Henderson. Henderson had already prepaid the $850 price of the bubble wrap in October.

Nov. 4 Pop-Pop mailed a $1,000 check to its supplier to pay for bubble wrap delivered in October.

Nov. 10 Pop-Pop delivered 600 yards of bubble wrap to Bob Cousy. Cousy has agreed to pay $2,400 for this bubble wrap, but had not paid by Nov. 30.

Nov. 13 Cedric Maxwell paid Pop-Pop $1,200 cash for bubble wrap delivered in October.

Nov. 14 Don Nelson ordered 400 yards of bubble wrap, to be delivered in December. Nelson prepaid the

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total price of $1,200 in cash.

Nov. 15 Pop-Pop received another 2,000 yards of bubble wrap from its supplier. It immediately mailed a check for the agreed price of $2,000 ($1.00/yd.).

Nov. 18 Pop-Pop sold 400 yards of bubble wrap to Tom Heinsohn for $2,000. Heinsohn paid cash and picked up the bubble wrap that same day.

Nov. 19 Pop-Pop sold 10 shares of stock to Sam Jones for a total of $500 cash ($50/share).

Nov. 20 Pop-Pop delivered 800 yards of bubble wrap to Sam Jones. Jones has not yet paid the agreed price of $2,400.

Nov. 21 Pop-Pop ordered miscellaneous supplies from an on-line store and paid $200. Pop-Pop has not yet received these supplies.

Nov. 22 Pop-Pop received another 1,000 yards of bubble wrap from its supplier. As of Nov. 30, Pop-Pop had not paid the agreed price of $1,500 ($1.50/yd.).

Nov. 27 Pop-Pop’s board of directors approved a cash dividend of $5 a share. The newest shareholder, Sam Jones, who bought his shares in the transaction on Nov. 19, is eligible for this dividend. Thus, the total amount of the dividend will be 2,010 shares x $5/share = $10,050. As of November 30, Pop-Pop had not paid this dividend.

Nov. 28 Pop-Pop delivered 700 yards of bubble wrap to Satch Sanders. Sanders paid the total price of $2,700 in cash upon delivery.

Nov. 30 Pop-Pop estimated that it had used up $50 worth of supplies in November.

Nov. 30 Pop-Pop received its phone bill for November, in the total amount of $120. Pop-Pop has not yet paid this bill.

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Nov. 30 Pop-Pop paid Ed Macauley, its only employee, his full monthly salary of $200.

Nov. 30 Pop-Pop did a physical count of its bubble wrap and determined that it had 1,800 yards remaining.

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Pop-Pop, Inc.Balance Sheet

As of October 31, 2016

AssetsCash $ 28,060 Accounts Receivable 1,750 Deferred Rent Expense 1,000 Inventory 2,700 Supplies 310

TOTAL ASSETS $ 33,820

Liabilities and Shareholders' EquityLiabilities

Accounts Payable $ 1,850 Deferred Sales Revenue 1,400 Income Taxes Payable 1,900

Shareholders' EquityCommon Stock 1,000 Additional Paid-In Capital 4,500 Retained Earnings 23,170

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,820