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Accounting for Lawyers
Professor Bradford
December 16, 2014
12:30 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.
5. Part I of the exam consists of five (5) questions. The recommended time
for each question is as follows:
Question 1……………………..…….. 25 Minutes
Question 2………………..………….. 20 Minutes
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Question 3…………………..……….. 40 Minutes
Question 4..………………………….. 20 Minutes
Question 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 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 doublespacing your exam; the software does all that for you when the exam
is printed.
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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 bla ck
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.
/s/ Paul Prez
CEO, Acme Corporation
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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 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
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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 Lawyers
Professor Bradford
December 16, 2014
12:30 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.
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.
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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,
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
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
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
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
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.
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.
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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.
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.
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 Corporation
Balance Sheet
As of October 31, 2014
Assets
Cash
Accounts Receivable
Note Receivable
Inventory
Accrued Interest Receivable
$ 6,820
2,310
580
440
20
TOTAL ASSETS
$ 10,170
Liabilities and Shareholders' Equity
Liabilities
Accounts Payable
Deferred Sales Revenue
Income Taxes Payable
Shareholders' Equity
Common Stock
Additional Paid-In Capital
Retained Earnings
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
250
230
490
2,000
3,000
4,200
$ 10,170