FINAL EXAMINATION

ACCOUNTING FOR LAWYERS

PROFESSOR ADAM

DECEMBER 7, 2005

INSTRUCTIONS:

1.                  You have three (3) hours to complete this examination.  You may allocate your time as you wish, and complete the exam in any order.

2.                  This is a closed book exam.  You may use a 5-function calculator, but no other materials of any kind are allowed, nor may you consult or collaborate with other students.

3.                  The exam consists of three parts, each worth 100 points for a total of 300 points.  Your exam grade will be your course grade.

·                    Part I consists of 25 multiple-choice questions, each worth 4 points.  Please mark your responses to the questions on the separate “ParSCORE” test form using pen or pencil and follow the instructions on that form.  Out of the four options, choose the best answer.  If you change your answer, place a clear “X” through the wrong answer and mark the correct one.  A machine will score the exam and any ambiguities will be counted as a wrong answer.

·                    Part II consists of journal entries, T-account sheets and trial balance sheets on which you directly write your answers and hand in.  These papers will be graded.  There will be extra sheets available to you if you need more writing space.

·                    Part III consists of a two-part essay based on a fact pattern.  Please write your responses in the blue books provided.  Write clearly and legibly.  Write on every other line and every other page to permit instructor comments.  If you are using exam software and typing your answers, be sure to frequently save to the diskette.

4.                  Write your exam number on your exam envelope.  Put your correct class section and student exam number at the top of this page, each page of questions, each blue book, and the ParSCORE test form.  Do not use your name, student ID number or Social Security number on any exam materials.

5.                  At the conclusion of the exam, return all test materials, including blue books, ParSCORE answer form, short answer sheets (journal entries, T-account and trial balance sheets) scratch paper, and this exam packet to the envelope and submit it to the proctor.  DO NOT seal the envelope.  Students who do not return all exam materials at the end of the exam may not be graded.

Good luck!

 PART III

Essay

On January 1, 2006, Pat and Terry started a new cosmetic manufacturing business called P & T Essentials.  They ran the business from one room in Pat’s home.  From January through March, they acquired the following pieces of equipment:

·                     A commercial blending machine that combines various cosmetic oils and dispenses them into small bottles that are manually placed under a faucet at the bottom of the machine.  The manufacturer states that the blender is very well engineered, and will last at least ten years with the proper maintenance.  It should easily produce 5 million bottles of product.  The blender cost $50,000.  The annual maintenance/tune-up fee is approximately $750.  Pat and Terry expect to produce at least 300,000 bottles per year.

·                     A new desktop with the latest microprocessor and software, pre-installed.  The software will perform most accounting functions and allow Pat and Terry to keep track of their product inventory.  The hardware cost $4,000.  The software cost $2,000.  Minor upgrades at a cost of $300 are published every year.  Major upgrades are produced every three years and cost $1,500.  The software company informs Pat and Terry that in the past, their customers have had to upgrade or replace their hardware to accommodate the major upgrades.

·                     Pat and Terry purchased a used labeling machine.  The manufacturer has sold this type of machine without major modifications for the past 40 years.  The machine will last ten years when new, and is now four years old.  The cost of a new machine is $2,000.  Pat and Terry purchased the machine through an online auction for $1,200.  The seller posted an independent appraisal that listed the fair market value of the machine at $1,500.  The machine will have zero salvage after ten years.

·                     Pat and Terry also had a custom logo designed for their new business and products.  The trademark search cost them $3,500 including legal fees.  Pat and Terry are committed to, and have the resources for, marketing their product of at least seven years

1.                 For the above items, please advise Pat and Terry regarding depreciation, amortization and the expenses related to their new equipment.

Pat and Terry also wish to protect themselves from any personal liability that their new venture may potentially create; however, they also wish to avoid double taxation.

2.                 Please advise them, with particularity, which business entities should they consider.

 

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