On August 1, Terry issued a $1,600,000, semi-annual, 6 year, 4.5% bond. The market rate for similar bonds on that day was 5.0%. Terry uses the effective interest method to record the amortization or premiums and discounts. Terrys management has decided to report net bonds on the balance sheet, instead of reporting the bond and its premium or discount separately. No entries have yet been made for the bond. Terrys management would like to know the effect of the sale on the following ratios:

Debt to Equity Ratio (Total Liabilities / Total Equity)

Current Ratio

ROA

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 new bond and any accrued interest (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

5.What do you think investors reaction will be to managements decision to issue a new bond? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with the decision to issue the new debt? Why or why not?

6.Terrys CFO has been concerned about the issuance of this bond. The company really doesnt need the additional cash at the moment, despite some vague plans to expand in the near future. The rest of the management team, on the other hand, felt that the additional cash would allow them to repurchase shares and pay a larger dividend for the period, both of which would help to calm investors fears after all of the changes that needed to be made to the financial statements this period. Provide two (2) arguments that the CFO could have used to try to talk his colleagues out of issuing the bond

Terry Co. Multi-Step Income Statement For the Year Ended December 31, Year 3 Sales Revenue A4 Sales Revenue Less: Sales Discounts $66,600,000 666,000 Sales Returns 55,827,500 $6,493,500 $60,106,500 Net Sales Revenue st Cost of Goods Sold Gross Profit 523,572,487 Operating Activities Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense $1,248,750 $566,100 5324,675 915,750 $3,330,000 Total Selling Expenses Administrative Expenses $6,930,563 Executive Salaries Expense Depreciation & Amortization Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense R&D Expense Utilities Expense S2 913,750 $1,998,000 5241,425 S32,884 258,075 999,000 Total Administrative Expenses Income from Operations 6.942.634 $13.873.197 59,699,290 Rent Revenue 5208,125 424,575 Interest Expense Income from Continuing Operations before Taxes 59,482,840 Income Tax Expense (2.370 710 Net Income $7,112,130 EPS 2.67 Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Year 2 Assets Current Assets Cash $3,996,000 $3,330,000 $5,994,000 $5,661,000 S333,000) (51,665,000) $7,992,000 $9,324,000 5499 500$999,000 $666,000 $18,981,000 $18,315,000 Allowance for Bad Debts Prepaid Insurance Prepaid Rent Total Current Assets Loans to other businesses $2,664,000 $2,664,000 2.843.560 $2.843.560 55,507,560 $5,507,560 Expansion Fund Total Long-term Investments Building Equipment Accumulated Depreciation $7,326,000 $4,662,000 55,328,000 $5,328,000 $18,648,000 8,658,000 660,000) 522,644,000 $11,988,000 658,000 Total PPE Intangible Assets Patents, net 999,000 48,131,560 $36,809.560 999,000 Total Assets Liabilities and Stockholders' Equity Current Liabilities Accounts Payable Income Tax Payable Unearned Revenue Wages Payable Current Portion of Loan Payable $3,044,570 $3,996,000 2,331,000 S666,000 51,198,800$999,000 5666,000$832,500 0 $333,000 57,573,370 $6,826,500 Total Current Liabilities Long-term Debt Loan Payable Notes Payable $3,663,000 $3,996,000 59,324,000 $5,328,000 $12,987,000 S9,324,000 $20,560,370 $16,150,500 Total Long-term Debt Total Liabilities Stockholders' Equity Common stock $2,660,000 $2,660,000 ($1 par, 4,655,000 authorized, 2,660,000 outstanding) Additional Paid-In capital $1,998,000 $1,998,000 $23,658,162 $16,746,032 5744,972 527,571,190 $20,659,060 Total Liabilities and Stockholder's Ea68 131.560 $36.809 560 45 Retained Eamings Accumulated OCI 5744,972 Total Stockholders' Equity Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 3 Cash Flow from Operations Net Income 57,112,130 Adjustments Change in A/R Change in Inventory Change in Prepaid Insurance Change in Prepaid Rent Depreciation & Amortization Change in AP Change in Income Tax Payable Change in Unearned Revenue Change in Wages Payable(S166.500) $2.744.870 ($1,665,000) $1,332,000 5499,500 (S166,500) $1,998,000 (S951,430) $1,665,000 $199,800 h ow f Net Cash Flow from Operations 59857,000 Cash Flow from Investments Purchase of Land ($2,664,000) 34. Purchase of Equipment Net Cash Flow from Investments (S12,654,000) Cash Flow from Financing Repayment of Loans ($333,000) 53,996,000 000) Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing Net Increase (Decrease) in Cash Cash, January 1, Year 2 Cash, December 31, Year2 $3,463,000 666,000 3.996.000