1 Ground Rules: 1. Read and follow directions carefully. Enter answers in the places indicated. 2. Be sure to show all your computations and related work. Part 1 ? ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (16 points) Storm and Strife LLP, an accrual basis law firm, showed an Accounts Receivable balance of $520,000 on its books at the end of 20x2. The firm uses the Accounts Receivable Aging method in determining its Allowance for Doubtful Accounts and Bad Debt Expense. An aging schedule of the Accounts Receivable showed the following: Estimated % Balance Age of Receivable Uncollectible $ 180,000 under 30 days 3.0 % 110,000 30-60 days 5.0 % 100,000 61-120 days 10.0 % 50,000 121-180 days 20.0% 50,000 180-240 days 25.0 % 30,000 over 240 days 30.0 % 520,000 A. What is the estimated amount of the firm?s Accounts Receivable that will prove to be uncollectible? Show your answer in the box below. 2 B. Assume the following: i. As noted above, the balance in Accounts Receivable before considering any of the following events is $520,000. ii. At the beginning of 20x2, without taking in account any of the transactions described in this problem, the balance in the firm?s Allowance for Doubtful Accounts (ADA) account showed a balance of $32,000. iii. During 20x2, the firm actually wrote off $15,000 of specific accounts that were identified as uncollectible. iv. During 20x2, an account in the amount of $10,000 that had been written off in a prior year was unexpectedly collected. Here are some T-accounts (with a couple of beginning balances) that you may find useful: Income Summary Cash (partial) Accounts Receivable 20x2 (Partial) 520,000 ADA 32,000 (beg) Based on your answer to ?A? above, complete the above T-accounts to reflect the transactions described above, and to enter the proper adjustment to the ADA that will also result in the correct (plugged) Bad Debt Expense being shown in Income Summary and thus matched to current revenues in the firm?s Income Statement. How much is the Bad Debt Expense for 20x2? Show your answer in the box below. C. Assume now that the firm used the cash method of accounting. How much in Bad Debt Expense would it show in its Income Statement for 20x2? Explain your answer and show the number in the box below. 3 D. Based on the above, show (below) how the Accounts Receivable would appear on the firm?s Balance Sheet at the end of 20x2, assuming again that the firm uses the accrual method of accounting. 4 Part 2 ? DEPRECIATION -- PROPERTY, PLANT & EQUIPMENT (16 points) On January 1, 20x1, Toody and Muldoon LLC purchased office equipment for $500,000. The firm estimates that the equipment has a useful life of 7 years and a salvage value of $50,000. Each of the following is independent unless otherwise indicated. Round all answers to the nearest dollar. A. Assuming the firm used the straight-line method of depreciation, how would the Balance Sheet presentation of the office equipment appear at December 31, 20x2? B. Assuming the firm used the sum-of-the-years digits method of depreciation, what would be the depreciation expense attributable to the office equipment in 20x3? Enter your answer in the box below. 5 C. Assuming the firm used the double declining balance method of depreciation, what would be the depreciation expense in 20x3? Enter your answer in the box below. D. Assuming the firm used the double declining balance method of depreciation, what would the book value of the office equipment be at the end of 20x3? Enter your answer in the box below. 6 Part 3 - DISPOSITION OF EQUIPMENT (5 points) Same as Question D of Part 2. Assume that Toody and Muldoon LLC moved its offices at the end of 20x3 and decided to sell its existing office equipment. For each of the following independent cases, describe how the firm?s Income Statement would be affected by the transaction if? A. The office equipment was sold on December 31, 20x4, for $100,000. B. The office equipment was sold on December 31, 20x4, for $200,000. 7 Part 4 - MATHEMATICS OF FINANCE (15 points) Your answers to each of the following should be computed by reference to the various Future Value and Present Value tables studied in Part 5 of the Course Materials. In each case, indicate which Table you are using. A. How much must Courtney put into an investment account today if she wants to accumulate $700,000 in the account in 20 years, assuming the account will earn interest at 8% per annum compounded annually? Enter your answer in the box below. B. Kent deposits $70,000 in an investment account that earns 8% per annum compounded annually. How much will be in the account after 25 years? Enter your answer in the box below. C. Mike deposits $15,000 per year for 30 years, starting today, in an investment account earning 6% compounded annually. How much will be in the account after 30 years (one year after the last deposit)? Enter your answer in the box below. D. Jessica promises to pay Savannah $100,000 in 6 years. How much will Savannah pay Jessica for this promise if Savannah wants to earn 12% compounded semi-annually on her ?investment? in this promise? Enter your answer in the box below. E. Allie wants to accumulate $300,000 in 15 years by making 15 annual deposits, starting today, into an investment account that will earn 9% per annum compounded annually. How much must each deposit be? Enter your answer in the box below. 8 Part 5 ? NOTES PAYABLE (18 points) A. Hill and Dale LLP borrowed $300,000 from its bank on September 1, 20x1, and signed a promissory note providing that it will repay all principal and interest in a single balloon payment in 4 years. i. How much will the firm owe after 4 years if the interest rate on the note is 14% and interest is compounded semi-annually? Enter your answer in the box below. (You may use the tables in Part 5 of the materials to compute your answer ? if so, indicate which table you used.) ii. How much interest expense will the firm show on its Income Statement for 20x1 if it is an accrual basis company and its year-end is December 31? Explain and enter your answer in the box below. iii. How much interest expense will the firm show on its Income Statement for 20x1 if it is a cash basis company and its year-end is December 31? Explain and enter your answer in the box below. B. Noble and Proud LLC purchased a small office building from which to conduct its law practice. The firm borrowed $800,000 under a 15-year (180-month) mortgage note that it signed at the closing of the building on July 1, 20x1. The note carries interest at 7%, and the first monthly payment is due on August 1, 20x1. All subsequent monthly payments are due on the first day of each month, with a 5-day grace period. Assume the firm makes each payment on the first day of each month or otherwise within the grace period. i. How much is the monthly payment? Enter your answer in the box below. Which Table (from Part 5 of the Course Materials) did you use? 9 ii. How much interest expense will the firm show on its Income Statement for 20x1 if it is an accrual basis company? Explain and enter your answer in the box below. iii. How much interest expense will the firm show on its Income Statement for 20x1 if it is a cash basis company? Explain and enter your answer in the box below. 10 Part 6 ? LEASES (18 points) On January 1, 20x1, Thomas and Thompson LLP (an accrual basis law firm) signed a 7-year computer lease with an annual payment (at the end of each year, starting December 31, 20x1) of $15,0001. Implicit in this lease transaction is a market discount interest rate of 10%. At the end of the lease, title to the computer automatically transfers to the firm; therefore, the lease must be accounted for by the firm as a capital lease. A. How are the firm's financial statements affected in the first year of the lease? Answer each of the following. i. Compute the present value of the lease payments and enter your answer in the box below. Which table in Part 5 of the materials did you use to determine your answer? ii. What asset is booked on the Balance Sheet as of January 1, 20x1, and for how much (enter the number in the box below)? iii. Assuming the computer has a useful life of 7 years (same as the lease term), how much amortization expense will the firm show on its Income Statement in 20x1 relating to the computer held under the lease? Enter your answer in the box below. 1 The lease payments are actually $1,250 per month but for the purposes of the calculations in this problem we will simplify things by assuming an annual payment, in arrears of $15,000. 11 iv. What liability is booked on the Balance Sheet as of January 1, 20x1, and for how much (enter the number in the box below)? v. How much interest expense will the firm show on its Income Statement for 20x1? Enter your answer in the box below. vi. What will be the ?carrying value? (i.e., the outstanding principal balance) of the Capital Lease Obligation that will appear on the Balance Sheet at the end of 20x1, after payment of the first $15,000 lease payment? Enter your answer in the box below. 12 PART 7 - RATIO ANALYSIS (12 points) Comparative balance sheets of the Ratio Corporation for 20X1 and 20x2, and Ravarino's 20x2 income statement, showed the following: RATIO CORP. Balance Sheets Dec. 31 Dec. 31 20x2 20x1 ASSETS: Current Assets: Cash 1,000 2,000 Accounts Receivable 5,000 4,000 Merchandise Inventory 12,000 9,000 Prepaid Rent 1,000 1,000 Total Current Assets 19,000 16,000 Property, Plant and Equipment * 22,000 23,000 Total Assets 41,000 39,000 LIABILITIES: Current Liabilities: Accounts Payable 10,000 6,000 Salaries Payable 1,800 500 Taxes Payable 200 1,500 Total Current Liabilities 12,000 8,000 Long Term Liabilities 10,000 10,000 Total Liabilities 22,000 8,000 STOCKHOLDERS' EQUITY: Common Stock 17,000 17,000 Retained Earnings 2,000 4,000 Total Stockholder's Equity 19,000 21,000 Total Liabilities and Stockholders' Equity 41,000 39,000 * Net of Accumulated Depreciation 13 RATIO CORP. Income Statement For the year ended 31 Dec. 20x2 Sales (75% on credit) 40,000 Less: Cost of Goods Sold (30,000) Gross margin on sales 10,000 Less: Operating Expenses (8,000) Income from Operations 2,000 Financial Items Interest Expense (1,000) Pretax income 1,000 Income taxes (20%) (200) Net Income 800 REQUIRED: Compute the ratios listed below for Ratio Corp. Ratios are to be computed for 20x2. Show all work. Explain what the ratio measures and how the law firm could use it. 1. Current Ratio 2. Inventory Turnover 3. Average Days in Inventory 4. Accounts Receivable Turnover 5. Average Days in Accounts Receivable 6. Debt-Equity Ratio

Ground Rules: 1. Read and follow directions carefully. Enter answers in the places indicated. 2. Be sure to show all your computations and related work. Part 1 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (16 points) Storm and Strife LLP, an accrual basis law firm, showed an Accounts Receivable balance of $520,000 on its books at the end of 20x2. The firm uses the Accounts Receivable Aging method in determining its Allowance for Doubtful Accounts and Bad Debt Expense. An aging schedule of the Accounts Receivable showed the following: Balance $ 180,000 110,000 100,000 50,000 50,000 30,000 520,000 A. Estimated % Uncollectible 3.0 % 5.0 % 10.0 % 20.0% 25.0 % 30.0 % Age of Receivable under 30 days 30-60 days 61-120 days 121-180 days 180-240 days over 240 days What is the estimated amount of the firm's Accounts Receivable that will prove to be uncollectible? Show your answer in the box below. 1 B. Assume the following: i. As noted above, the balance in Accounts Receivable before considering any of the following events is $520,000. ii. At the beginning of 20x2, without taking in account any of the transactions described in this problem, the balance in the firm's Allowance for Doubtful Accounts (ADA) account showed a balance of $32,000. iii. During 20x2, the firm actually wrote off $15,000 of specific accounts that were identified as uncollectible. iv. During 20x2, an account in the amount of $10,000 that had been written off in a prior year was unexpectedly collected. Here are some T-accounts (with a couple of beginning balances) that you may find useful: Cash (partial) Income Summary 20x2 (Partial) Accounts Receivable 520,000 ADA 32,000 (beg) Based on your answer to 'A' above, complete the above T-accounts to reflect the transactions described above, and to enter the proper adjustment to the ADA that will also result in the correct (plugged) Bad Debt Expense being shown in Income Summary and thus matched to current revenues in the firm's Income Statement. How much is the Bad Debt Expense for 20x2? Show your answer in the box below. C. Assume now that the firm used the cash method of accounting. How much in Bad Debt Expense would it show in its Income Statement for 20x2? Explain your answer and show the number in the box below. 2 D. Based on the above, show (below) how the Accounts Receivable would appear on the firm's Balance Sheet at the end of 20x2, assuming again that the firm uses the accrual method of accounting. 3 Part 2 - DEPRECIATION -- PROPERTY, PLANT & EQUIPMENT (16 points) On January 1, 20x1, Toody and Muldoon LLC purchased office equipment for $500,000. The firm estimates that the equipment has a useful life of 7 years and a salvage value of $50,000. Each of the following is independent unless otherwise indicated. Round all answers to the nearest dollar. A. Assuming the firm used the straight-line method of depreciation, how would the Balance Sheet presentation of the office equipment appear at December 31, 20x2? B. Assuming the firm used the sum-of-the-years digits method of depreciation, what would be the depreciation expense attributable to the office equipment in 20x3? Enter your answer in the box below. 4 C. Assuming the firm used the double declining balance method of depreciation, what would be the depreciation expense in 20x3? Enter your answer in the box below. D. Assuming the firm used the double declining balance method of depreciation, what would the book value of the office equipment be at the end of 20x3? Enter your answer in the box below. 5 Part 3 - DISPOSITION OF EQUIPMENT (5 points) Same as Question D of Part 2. Assume that Toody and Muldoon LLC moved its offices at the end of 20x3 and decided to sell its existing office equipment. For each of the following independent cases, describe how the firm's Income Statement would be affected by the transaction if... A. The office equipment was sold on December 31, 20x4, for $100,000. B. The office equipment was sold on December 31, 20x4, for $200,000. 6 Part 4 - MATHEMATICS OF FINANCE (15 points) Your answers to each of the following should be computed by reference to the various Future Value and Present Value tables studied in Part 5 of the Course Materials. In each case, indicate which Table you are using. A. How much must Courtney put into an investment account today if she wants to accumulate $700,000 in the account in 20 years, assuming the account will earn interest at 8% per annum compounded annually? Enter your answer in the box below. B. Kent deposits $70,000 in an investment account that earns 8% per annum compounded annually. How much will be in the account after 25 years? Enter your answer in the box below. C. Mike deposits $15,000 per year for 30 years, starting today, in an investment account earning 6% compounded annually. How much will be in the account after 30 years (one year after the last deposit)? Enter your answer in the box below. D. Jessica promises to pay Savannah $100,000 in 6 years. How much will Savannah pay Jessica for this promise if Savannah wants to earn 12% compounded semi-annually on her \"investment\" in this promise? Enter your answer in the box below. E. Allie wants to accumulate $300,000 in 15 years by making 15 annual deposits, starting today, into an investment account that will earn 9% per annum compounded annually. How much must each deposit be? Enter your answer in the box below. 7 Part 5 - NOTES PAYABLE (18 points) A. Hill and Dale LLP borrowed $300,000 from its bank on September 1, 20x1, and signed a promissory note providing that it will repay all principal and interest in a single balloon payment in 4 years. i. ii. How much interest expense will the firm show on its Income Statement for 20x1 if it is an accrual basis company and its year-end is December 31? Explain and enter your answer in the box below. iii. B. How much will the firm owe after 4 years if the interest rate on the note is 14% and interest is compounded semi-annually? Enter your answer in the box below. (You may use the tables in Part 5 of the materials to compute your answer - if so, indicate which table you used.) How much interest expense will the firm show on its Income Statement for 20x1 if it is a cash basis company and its year-end is December 31? Explain and enter your answer in the box below. Noble and Proud LLC purchased a small office building from which to conduct its law practice. The firm borrowed $800,000 under a 15-year (180-month) mortgage note that it signed at the closing of the building on July 1, 20x1. The note carries interest at 7%, and the first monthly payment is due on August 1, 20x1. All subsequent monthly payments are due on the first day of each month, with a 5-day grace period. Assume the firm makes each payment on the first day of each month or otherwise within the grace period. i. How much is the monthly payment? Enter your answer in the box below. Which Table (from Part 5 of the Course Materials) did you use? 8 ii. How much interest expense will the firm show on its Income Statement for 20x1 if it is an accrual basis company? Explain and enter your answer in the box below. iii. How much interest expense will the firm show on its Income Statement for 20x1 if it is a cash basis company? Explain and enter your answer in the box below. 9 Part 6 - LEASES (18 points) On January 1, 20x1, Thomas and Thompson LLP (an accrual basis law firm) signed a 7-year computer lease with an annual payment (at the end of each year, starting December 31, 20x1) of $15,0001. Implicit in this lease transaction is a market discount interest rate of 10%. At the end of the lease, title to the computer automatically transfers to the firm; therefore, the lease must be accounted for by the firm as a capital lease. A. How are the firm's financial statements affected in the first year of the lease? Answer each of the following. i. Compute the present value of the lease payments and enter your answer in the box below. Which table in Part 5 of the materials did you use to determine your answer? ii. What asset is booked on the Balance Sheet as of January 1, 20x1, and for how much (enter the number in the box below)? iii. Assuming the computer has a useful life of 7 years (same as the lease term), how much amortization expense will the firm show on its Income Statement in 20x1 relating to the computer held under the lease? Enter your answer in the box below. 1 The lease payments are actually $1,250 per month but for the purposes of the calculations in this problem we will simplify things by assuming an annual payment, in arrears of $15,000. 10 iv. What liability is booked on the Balance Sheet as of January 1, 20x1, and for how much (enter the number in the box below)? v. How much interest expense will the firm show on its Income Statement for 20x1? Enter your answer in the box below. vi. What will be the 'carrying value\" (i.e., the outstanding principal balance) of the Capital Lease Obligation that will appear on the Balance Sheet at the end of 20x1, after payment of the first $15,000 lease payment? Enter your answer in the box below. 11 PART 7 - RATIO ANALYSIS (12 points) Comparative balance sheets of the Ratio Corporation for 20X1 and 20x2, and Ravarino's 20x2 income statement, showed the following: RATIO CORP. Balance Sheets Dec. 31 20x2 Dec. 31 20x1 ASSETS: Current Assets: Cash Accounts Receivable Merchandise Inventory Prepaid Rent Total Current Assets 1,000 5,000 12,000 1,000 19,000 2,000 4,000 9,000 1,000 16,000 Property, Plant and Equipment * 22,000 23,000 Total Assets 41,000 39,000 LIABILITIES: Current Liabilities: Accounts Payable Salaries Payable Taxes Payable Total Current Liabilities 10,000 1,800 200 12,000 6,000 500 1,500 8,000 Long Term Liabilities 10,000 10,000 Total Liabilities 22,000 8,000 STOCKHOLDERS' EQUITY: Common Stock Retained Earnings Total Stockholder's Equity 17,000 2,000 19,000 17,000 4,000 21,000 Total Liabilities and Stockholders' Equity 41,000 39,000 * Net of Accumulated Depreciation 12 RATIO CORP. Income Statement For the year ended 31 Dec. 20x2 Sales (75% on credit) Less: Cost of Goods Sold Gross margin on sales Less: Operating Expenses Income from Operations Financial Items Interest Expense Pretax income Income taxes (20%) Net Income REQUIRED: 40,000 (30,000) 10,000 (8,000) 2,000 (1,000) 1,000 (200) 800 Compute the ratios listed below for Ratio Corp. Ratios are to be computed for 20x2. Show all work. Explain what the ratio measures and how the law firm could use it. 1. Current Ratio 2. Inventory Turnover 3. Average Days in Inventory 4. Accounts Receivable Turnover 5. Average Days in Accounts Receivable 6. Debt-Equity Ratio 13