Information:

Terry has three main classifications of employees: management, designers, and production workers. In

order to retain their qualified design (or research) staff, Terry has offered them a small defined benefit

pension if they remain with the company until their retirement. Terrys management team has been

provided with a 401(k) (despite numerous complaints from the management team that they also

deserve a pension). Since the production team traditionally turns over very quickly with little adverse

effect on the company, Terry does not provide any pension or 401(k) contributions for these workers.

Instead, they have provided them with opportunities to contribute into self-funded retirement plans

At the end of Year 2, the pension benefit obligation for the design team was $4,131,000 and the plan

was fully funded (i.e. plan assets were also $4,131,000). They also had no balance in accumulated other

comprehensive income for pensions. Because of this, the pension did not appear on Terrys Year 2

balance sheet. The pension expense and contributions for Year 3 have not yet been recognized.

On December 31st, Terry contributed $1,562,000 to managements 401(k) and $520,506 to the

designers pension fund. On that same day, Terry received the following information from their

actuarial firm:

1. The annual service cost was $99,900.
2. The expected return on plan assets was 7.0% and the discount rate on the pension benefit obligation was 6.0%.
3. The actuarial adjustment to the obligation for the year reduced the projected obligation by $39,960.

The plans administrator reported that the plan paid out $598,582 in benefits for the year and had an

ending asset balance of $4,544,100.

Terrys management would like to know the effect of the sale on the following ratios

-Profit Margin

Debt-to-Equity

ROE

Assignment:

1. Calculate each of the three (3) ratios before you make any adjustments.
2. Fill out a pension worksheet for the changes to the defined benefit pension
3. Make the appropriate journal entries, if any, to account for the pension costs (including any necessary changes to income tax expense). Assume that compensation for the design team is recorded as part of R&D Expense.
4. Make any necessary changes to the financial statements. Please see the hints about the special adjustment to the Statement of Cash Flows
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?

Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Year 2 Assets Current Assets 3 $3,330.00o $5,904,000 $5,681,000 $333,000) ($1,885,000) $7,992,000 S9.324,000 5499,500 $99,000 5832,500 $886,000 $18,899,889 $18,315,000 Allowance for Bad Debts Prepaid Insurance Prepaid Utilities Total Current Assets Loans to other bus nesses Expansion Fund $2,884,000 $2.684,000 Total Long-term Investments $5,507,560 $5.507 580 $7,326,000 4,682000 $5,328,000 $5,328,000 $18,848,000 S8,858,000 Total PPE 522,844.000 $11,888,000 ntangible Assets Patents, net $99.000 548,050,529 $36.809,580 $999,000 Total Assets Liabilities and Stockholders Equity Current Liabilities Accounts Payable Dividends Payable ncome Tax Payable nterest Payable Uhearned Revenue Wages Payable Current Portion of Loan Payable $3,044,570 S3,896,000 $562,500 $2,322,880 688,000 $30,000 $1,198,800 $99,000 $868,000 $832 500 Total Current Liabilities $8, 157,750 $8,828,500 Long-temm Debt Loan Payable Bonds Payable, net Notes Payable $3,883,000 $3,996,000 $1,581.447 S9,324,000 $5,328,000 $14,548,447 $9.324,000 Total Long-term Debt $22,706, 198 $16,150.500 Total Liabilties Stockholders' Equity Common stock ($1 par, 4,855,000 authorized, 2,860,000 issued, and 2 455,000 Additional Paid-In capital Treasury Stock (205,000 shares owned) Retained Eamings Accumulated OCI $2,860,000 S2680,000 $1,998,000 $1,998,000 $1,840,000) 523,071,303 $16.748,032 Total Stockholders Equity Total Liabilities and Stockholder's Equity ($744,972) 525,344,331 520,859,080 $48,050,529 $36,809,580 Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 3 Cash Flow from Operations $7,087,771 Change in Income Tax Payable Change in Wages Payable(166 500) Net Cash Flow from Operations $2,769 229 Net Cash Flow from Investments $12,654,000 Net Cash Flow from Financing $584,969 3,330,000