ACCOUNTING FOR LAWYERS
Professor Adam
Final Examination
Fall 2002



1. You have three (3) hours to complete this exam.

2. This is a closed book exam. You may use a 5-function calculator, but no other materials.

3. This exam consists of three (3) parts. You may complete the exam in any order you wish and you may switch between parts if you wish.

4. You may write on any of the exam materials, but only the following will be graded.

4. Write your exam number on your exam envelope, and all exam materials. 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 to the envelope and submit it to the proctor.

GOOD LUCK!

* Extra sheets are available if you need them.


Part 3-Essay

Two years ago, Carole was laid-off from her high-tech job and started anew business. She opened a retail gift store in San Francisco. Her knowledge of running her own business came from a "self-help"- "how to" book. Carole has never consulted an attorney or an accountant. She incorporated her business, as a closely held "C" Corporation, naming herself as the sole corporate shareholder and corporate officer. Apart from the initial incorporation papers that she got from a "do-it-yourself" kit, she has not filed any other corporate reports. Upon incorporating, she issued to herself 1,000 shares of corporate common stock in exchange for $50,000 that she had in personal savings.

During the first two years, she paid herself no salary. Instead, she "withdrew" $100,000 for her personal use. She believed that this would allow her to avoid personal income taxes. Her corporation posted a net profit of $90,000 over the same two years. During the first year of operations, Carole depreciated all of the store's furniture and equipment using the doubledeclining method. In the second year, she used the straight-line method. During both years, the general economy has been inflationary. In the first year, Carole used the FIFO inventory method, and switched to the LIFO method in the second year. Moreover, whenever Carole purchased inventory for resale, she would receive a discount if she paid "cash on delivery." She did this using actual cash from the cash register. However, when she accounted for the purchase of the inventory, she would record the non-discounted price. Because she incorporated her business, Carole felt protected from the reach of creditors. Accordingly, she did not carry any form of premises liability insurance for the store. When she signed the lease for her storefront, her landlord required her to sign as corporate president, and as an individual. Carole did so without consulting counsel.

Carol was not aware that a "C" Corporation was required to file a tax return. She is beginning her third year of operations, and has applied for a loan with a local bank. The bank loan officer wants to see financial statements, tax returns, and other corporate records.

Carole wants you to help her compile the necessary information. What legal, accounting, and tax issues should you bring to her attention? How would you advise her regarding those issues?

END OF EXAM