Stock Options On January 1st year 3, Terrys Board of Directors issued the management team 25,600 stock options for Terrys $1 par common stock. Terrys stock price on that day was $3.60/share. The Board set the strike price of the options at $5.20/share to encourage the management team to focus on improving the companys stock price. The average stock price during Year 3 was $6.80/share. The options vest at the end of year 3 and according to the Black Scholes Model, have a fair value of $4.80 each on the date issued. Terrys management was pleased with the decision because this is the first time that the Board has offered them options as a form of compensation, although they were disappointed that the options could only be used to purchase stock, not redeemed for their fair value. No options were exercised in year 3. Preferred Stock To expand their marketing, Terry needed to raise more capital. Thus, on June 30th year 3, Terry issued 10,000 shares of 5% $100 par noncumulative nonparticipating preferred stock for $125 per share. Of these 10,000 shares, Terry included a conversion feature in 2,000 of these shares. This conversion feature allows the investor to convert 1 share of preferred stock into 6 shares of common stock at will. Share Repurchase Later in year 3, on November 15 when a market change significantly dropped stock prices, Terrys Board voted to repurchase 8,000 shares of common stock. The stock price on the day of the purchase was $8.00/share. Terry company prefers to use the Treasury stock method. Preferred Dividends At December 31st, year 3 Terry declared and paid a preferred dividend of $2.50 per share. As of December 31st, year 3 no preferred shareholders had converted their stock into common stock. Note that earlier in year 3, on March 31st, Terry had declared and paid $200,000 in dividends to common shareholders. This dividend to common shareholders was correctly reported and is already reflected in the preliminary financial statements. 1. Calculate the below ratios on Excel before you make any adjustments (using the preliminary financial statements). Make sure to use Excel formulas so that the CEO can clearly see which numbers you are using to calculate these ratios. a. Basic EPS b. Diluted EPS 2. Make the appropriate journal entries in Excel to correctly record the stock options, preferred stock, share repurchase, and preferred dividend. Also, be sure to add other journal entries that may be impacted (e.g., tax expense and retained earnings see hints). Show both your calculations and the journal entries in Excel. 3. Update the final financial statements to reflect the correct updated balances. Be sure to show with formulas how you are calculating the account balance (e.g., preliminary number + journal entry change). Also, make sure all of the subtotals and totals are adjusted accordingly. 4. Calculate the below ratios on Excel after you make the adjustments (using the final financial statements). Again, make sure to use Excel formulas so that the CEO can clearly see which numbers you are using to calculate these ratios. a. Basic EPS b. Diluted EPS

Terry Co Multi-Step Income Statement For the Year Ended December 31, Year 3 Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Year 2 2 $8,390,400 Assets Sales Revenue Sales Revenue Less: Sales Discounts Sales Returns Net Sales Revenue Current Assets $89,100 $708,750 $797,850 $7,592,550 Cost of Goods Sold Cost of Goods Sold Gross Profit $212,815 $729,000 ($40,500) $723,000 $60,750 $101,250 $1,786,315 $405,000 $688,500 ($ 202,500) $1,134,000 $121,500 $81,000 $2,227,500 $4,692,326 $2,900,224 Cash A/R Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building $324,000 $41,420 $365,420 $324.000 $41,420 $365,420 $151.875 $68,850 $39,488 $111,375 $405,000 $66,319 Operating Activities Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Total Selling Expenses Administrative Expenses Executive Salaries Expense Depreciation & Amortization Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense R&D Expense Utilities Expense Total Administrative Expenses Income from Operations $891,000 $648,000 $3,564,665 $2,268,000 ($1.290,644) $6,081,021 $842,907 $567.000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $354,375 $480,644 $29.363 $3.999 $31,388 $121,500 $60,750 $121,500 $8,354,256 $121,500 $4,172,420 $1,082,019 $1.924,926 $975,298 Other Gains and Losses Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 Income Tax Payable $219,394 Interest Payable $4,813 Unearned Revenue $140,300 Wages Payable $89,100 Current Portion of Loan Payable $40,500 Total Current Liabilities $1,086,644 Long-term Debt Loan Payable $445,500 Bonds Payable (net) $204.359 $486.000 $81,000 $0 $121,500 $101.250 $40.500 $830,250 $25,313 ($111,818) ($86,505) $888,793 ($222,198) $666,595 $486.000 $0 $365,420 $365,420 Total Long-term Investments PPE Land Building ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $891,000 $648,000 $3,564,665 $2,268,000 ($1,290,644) $6,081,021 $567,000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 $121,500 $8,354,256 $121,500 $4,172,420 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 $486,000 Income Tax Payable $219,394 $81,000 Interest Payable $4,813 $0 Unearned Revenue $140,300 $121,500 Wages Payable $89,100 $ 101,250 Current Portion of Loan Payable $40,500 $40,500 Total Current Liabilities $1,086,644 $830,250 Long-term Debt Loan Payable $445,500 $486,000 Bonds Payable (net) $204,359 $0 Lease Liability $2,808,988 $0 Notes Payable $1,134,000 $648.000 Total Long-term Debt $4,592,847 $1,134,000 Total Liabilities $5,679,491 $1,964,250 Stockholders' Equity Common stock $320,000 $320,000 ($1 par, 560,000 authorized 320000 issued and outstanding) Additional Paid-In Capital $243,000 $243,000 Retained Earnings $2,122,955 $1,656,360 Accumulated OCI ($11,190) ($11,190) Total Stockholders' Equity $2,674,765 $2,208,170 Total Liabilities and Stockholder's Equit $8,354,256 $4,172,420 Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Assets Year 2 $666,595 Current Assets Cash A/R $212.815 $729,000 ($40,500) $723,000 $60,750 $ 101,250 $1,786,315 $405,000 $688,500 ($ 202,500) $1,134,000 $121,500 $81,000 $2,227,500 Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 3 Cash Flow from Operations Net Income Adjustments: Change in AR ($ 202,500) Change in Inventory $411,000 Change in Prepaid Insurance $60,750 Change in Prepaid Rent ($20,250) Depreciation & Amortization $480,644 Amortization of Bond Discount $289 Stock Option Compensation SO Change in AP $ 106,537 Change in Income Tax Payable $138,394 Change in Interest Accrued $59,891 Change in Unearned Revenue $18,800 Change in Wages Payable ($12,150) Net Cash Flow from Operations $324,000 $41,420 $365,420 Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $324.000 $41,420 $365,420 $1,041,405 $1,708,000 $891,000 $648,000 $3,564,665 $2,268,000 ($1,290,644) $6,081,021 $567,000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 Cash Flow from Investments Purchase of Land Purchase of Equipment Net Cash Flow from Investments ($324,000) ($1,231,000) ($1,555,000) $121,500 $8,354,256 $121,500 $4,172,420 SO ($40,500) $0 ($794,755) $204,070 $486,000 ($200,000) $0 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 Income Tax Payable $219,394 Interest Payable $4,813 Unearned Revenue $140,300 Wages Payable $89,100 Current Portion of Loan Payable $40,500 Total Current Liabilities $1,086,644 Long-term Debt Loan Payable $445,500 Bonds Payable (net) $204 359 Cash Flow from Financing Cash from Issuance of Preferred Stock Repayment of Loans Purchase of Treasury Stock Payment on Financing Lease Issuance of Bonds Payable Issuance of Notes Payable Payments of Dividends to Common Sh Payments of Dividends to Preferred Sh Net Cash Flow from Financing $486,000 $81,000 $0 $121,500 $101,250 $40,500 $830,250 ($345,185) Net Increase (Decrease) in Cash Cash, January 1, Year 3 Cash, December 31, Year 3 ($ 192,185) $405,000 $212,815 $486,000 $0 Terry Co Multi-Step Income Statement For the Year Ended December 31, Year 3 Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Year 2 2 $8,390,400 Assets Sales Revenue Sales Revenue Less: Sales Discounts Sales Returns Net Sales Revenue Current Assets $89,100 $708,750 $797,850 $7,592,550 Cost of Goods Sold Cost of Goods Sold Gross Profit $212,815 $729,000 ($40,500) $723,000 $60,750 $101,250 $1,786,315 $405,000 $688,500 ($ 202,500) $1,134,000 $121,500 $81,000 $2,227,500 $4,692,326 $2,900,224 Cash A/R Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building $324,000 $41,420 $365,420 $324.000 $41,420 $365,420 $151.875 $68,850 $39,488 $111,375 $405,000 $66,319 Operating Activities Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Total Selling Expenses Administrative Expenses Executive Salaries Expense Depreciation & Amortization Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense R&D Expense Utilities Expense Total Administrative Expenses Income from Operations $891,000 $648,000 $3,564,665 $2,268,000 ($1.290,644) $6,081,021 $842,907 $567.000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $354,375 $480,644 $29.363 $3.999 $31,388 $121,500 $60,750 $121,500 $8,354,256 $121,500 $4,172,420 $1,082,019 $1.924,926 $975,298 Other Gains and Losses Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 Income Tax Payable $219,394 Interest Payable $4,813 Unearned Revenue $140,300 Wages Payable $89,100 Current Portion of Loan Payable $40,500 Total Current Liabilities $1,086,644 Long-term Debt Loan Payable $445,500 Bonds Payable (net) $204.359 $486.000 $81,000 $0 $121,500 $101.250 $40.500 $830,250 $25,313 ($111,818) ($86,505) $888,793 ($222,198) $666,595 $486.000 $0 $365,420 $365,420 Total Long-term Investments PPE Land Building ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $891,000 $648,000 $3,564,665 $2,268,000 ($1,290,644) $6,081,021 $567,000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 $121,500 $8,354,256 $121,500 $4,172,420 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 $486,000 Income Tax Payable $219,394 $81,000 Interest Payable $4,813 $0 Unearned Revenue $140,300 $121,500 Wages Payable $89,100 $ 101,250 Current Portion of Loan Payable $40,500 $40,500 Total Current Liabilities $1,086,644 $830,250 Long-term Debt Loan Payable $445,500 $486,000 Bonds Payable (net) $204,359 $0 Lease Liability $2,808,988 $0 Notes Payable $1,134,000 $648.000 Total Long-term Debt $4,592,847 $1,134,000 Total Liabilities $5,679,491 $1,964,250 Stockholders' Equity Common stock $320,000 $320,000 ($1 par, 560,000 authorized 320000 issued and outstanding) Additional Paid-In Capital $243,000 $243,000 Retained Earnings $2,122,955 $1,656,360 Accumulated OCI ($11,190) ($11,190) Total Stockholders' Equity $2,674,765 $2,208,170 Total Liabilities and Stockholder's Equit $8,354,256 $4,172,420 Terry Co. Balance Sheet As of 12/31/Year 3 Year 3 Assets Year 2 $666,595 Current Assets Cash A/R $212.815 $729,000 ($40,500) $723,000 $60,750 $ 101,250 $1,786,315 $405,000 $688,500 ($ 202,500) $1,134,000 $121,500 $81,000 $2,227,500 Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 3 Cash Flow from Operations Net Income Adjustments: Change in AR ($ 202,500) Change in Inventory $411,000 Change in Prepaid Insurance $60,750 Change in Prepaid Rent ($20,250) Depreciation & Amortization $480,644 Amortization of Bond Discount $289 Stock Option Compensation SO Change in AP $ 106,537 Change in Income Tax Payable $138,394 Change in Interest Accrued $59,891 Change in Unearned Revenue $18,800 Change in Wages Payable ($12,150) Net Cash Flow from Operations $324,000 $41,420 $365,420 Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building ROU Asset Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets $324.000 $41,420 $365,420 $1,041,405 $1,708,000 $891,000 $648,000 $3,564,665 $2,268,000 ($1,290,644) $6,081,021 $567,000 $648,000 $0 $1,053,000 ($810,000) $1,458,000 Cash Flow from Investments Purchase of Land Purchase of Equipment Net Cash Flow from Investments ($324,000) ($1,231,000) ($1,555,000) $121,500 $8,354,256 $121,500 $4,172,420 SO ($40,500) $0 ($794,755) $204,070 $486,000 ($200,000) $0 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $592,537 Income Tax Payable $219,394 Interest Payable $4,813 Unearned Revenue $140,300 Wages Payable $89,100 Current Portion of Loan Payable $40,500 Total Current Liabilities $1,086,644 Long-term Debt Loan Payable $445,500 Bonds Payable (net) $204 359 Cash Flow from Financing Cash from Issuance of Preferred Stock Repayment of Loans Purchase of Treasury Stock Payment on Financing Lease Issuance of Bonds Payable Issuance of Notes Payable Payments of Dividends to Common Sh Payments of Dividends to Preferred Sh Net Cash Flow from Financing $486,000 $81,000 $0 $121,500 $101,250 $40,500 $830,250 ($345,185) Net Increase (Decrease) in Cash Cash, January 1, Year 3 Cash, December 31, Year 3 ($ 192,185) $405,000 $212,815 $486,000 $0