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On December 15th, Terry's management decided to trade in one of their machines for a newer model. After long discussions with their auditors, Terrys management has decided that the change in capacity between the old and new machines makes this an exchange without substance. The old machine originally cost $670,000 and had been fully depreciated to its $50,300 salvage value. The new machine typically sells for $891,000, but the vendor offered Terry a $73,000 trade-in discount on the old machine if the balance is paid in cash. Terry's management was excited about the deal, since they would have been able to sell the old machine for only $50,300 if they had tried to dispose of it on the open market. Although the deal was completed on December 29th, no journal entries have yet been recorded. Terrys management would like to know the effect of the sale on the following ratios: Asset Turnover (Net Sales / average total assets) Current Ratio ROA /// Assignment: Calculations 1. Calculate each of the three (3) ratios before you make any adjustments. /// 2. Make the appropriate journal entries, if any, to account for the trade-in (including any necessary changes to income tax expense). /// 3. Make any necessary changes to the financial statements. /// 4. Calculate the three (3) ratios after you make any adjustments. /// Critical Thinking /// 5. What do you think Terrys creditors (i.e. bank and bond holder) reaction will be to the exchange? In other words, based on your changes to the financial statements and the change in the ratios, do you think the creditors will be happy with the exchange? Why or why not /// 6. Terrys CFO argued that the company should wait to exchange the machine until they had used it for two more years. Even though we would have to fight with the old machine, he argued, we could depreciate it to $0, and we know we can sell it for more than that. That would give us a boost to EPS. What would be the consequences of following the CFOs suggestion? What would be the consequences for making the exchange now