1. You have three (3) hours to complete this exam. You may complete the exam in any order you wish and you may switch between parts if you wish.

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

3. This exam is consists of the following three (3) parts:

Part 1—Multiple Choice Questions
Part 2—Accounting Transactions
Part 3—Essay

4. Correct multiple choice answers are to be marked on the separate “ParSCORE TEST FORM” using pen or pencil and following the instructions on that form. If you change your answer, place a clear X through the wrong answer and mark the correct answer. A machine will score the exam and any ambiguities will be counted as a wrong answer.

5. Answer the essay question in the Blue Books provided. Please write clearly. Write on every other line and every other page to permit instructor comments.

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

1. Your ParScore test form
2. Your Journal Entry Sheet(s)*
3. Your T-Account Sheet(s) *
4. Your Trial Balance Sheet(s) *
5. Your Blue Book

*Extra sheets are available if you need them.

7. Write your exam number on your exam envelope. Put your student exam # 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.

8. At the conclusion of the exam, return all exam materials to the exam 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!

Final Exam—Part 3—Essay

Part A

Last year (2003), Eric lost his job as an engineer. He decided to start his own engineering practice. He wants to open a home office in San Mateo using the name “Freedom Engineering.” Eric has little knowledge about running his own business, but he has done some research. From his research, he has narrowed his choice of business entities to an LLP, a Sole Proprietorship, or an S Corporation. Eric has come to you to help him decide which business entity he should choose.

Please advise him about the pros and con of each entity as they apply to him.

Part B

During the first six months of his practice, Eric kept his own accounting records using an inexpensive computer accounting program. He knows of your knowledge of accounting and asks you to look at his financial records. From your examination of these records and your (privileged) discussions with Eric, you discover the following:

1. Eric accounts for his revenue only when he receives a cash payment from his clients.

2. Eric accounts for his business expenses when he incurs the expenses, regardless of when he pays the expenses.

3. Eric purchased some beautiful antique office furniture for $3, 000.00. Just after his purchase, He had the furniture appraised, and discovered that it was worth $7,500.00. His general ledger reflects the $7,500.00 value.

4. Eric wants to borrow $50,000 from a local bank. He borrowed $20,000 from his friend, and used the proceeds for business purposes. This loan is not on the business’ balance sheet, and Eric does not want to tell the bank about this existing loan.

5. Eric owns his home that is worth $750,000.00. His home is mortgage free. You discover that Eric does not carry any professional liability insurance.

Please advise Eric about the above issues.

END OF EXAM