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. Calculations

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) Calculate the three (3) ratios after you make any adjustments.

Critical Thinking:

6) 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?

7) How do you think Terrys board should respond to managements insistence that they also deserve a defined benefit pension? Write your answer in the form of a short email that the board could send to the management team

Terry Co. Balance Shoot As of 12/31Year 3 Year 3 Assets Current Assets Cash VR Allowance for Bad Debts $3,914,969 $3,330,000 S5,994,000 S5.661,000 (5333,000) ($1,665,000) $7,992,000 S9,324,000 499,500 $999.000 $668,000 $18,899,969 $18,315,000 Prepaid Insurance Prepaid Utilities $832,500 Total Current Assets Loans to other businesses Expansion Fund $2,664,000 S2.664,000 S2,843,560 S2 843,560 $5,507,560 S5 507,560 Total Long-term Investments PPE Land $7,326,000 $4,662,000 $5,328,000 S5.328,000 $18,648,000 $8,658,000 Accumulated Depreciation 8,658 ($6,660 Total PPE Intangible Assets Patents, net $22,644,000 $11,988,000 $999,000 $999,000 $48,050,529 $36,809,560 Total Assets Liabilities and Stockholders' Equity Current Liabilities Accounts Payable Income Tax Payable Interest Payable Uneamed Revenue Wages Payable Current Portion of Loan Payable $3,044,570 S3,99,000 30 2,322,880 $66,000 $0 $1,198,800 $999.000 $666,000 $832,500 $333,000 $333,000 $8,157,750 $6,826,500 S30,000 Total Current Liabilities Long-term Debt Loan Payable Bonds Payable, net Notes Payable $3,663,000 $3.996,000 $0 S9,324.000 S5.328.000 $14,548,447 $9,324,000 $22,706,198 $16,150,500 $1,561,447 Total Long-term Debt Total Liablities Stockholders' Equity Common stock 2,660,000 S2,660,000 ($1 par, 4,655,000 authorized, 2,660,000 issued, and 2,455,000 outstanding) Additional Paid-In capital Treasury Stock (205,000 shares owned) Retained Eamings Accumulated OCI $1,998,000 $1,998,000 $0 $23,071,303 $16,746,032 ($1,640,000) 44,972 744 Total Stockholders Equity Total Liabilities and Stockholder's Equity $25,344,331 $20,659,060 $48,050,529 $36,809,560 Terry Co. Multi-Step Income Statement For the Year Ended December 31, Year 3 Sales Revenue Less: Sales Discounts $66,600,000 $666,000 $5,827,500 Sales Returns Net Sales Revenue $60,106,500 Cost of Goods Sold $36,534,013 $23,572,487 Gross Profit Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense $1,248,750 $566,100 $324,675 $915,750 $3,330,000 $545,288 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 $2,913,750 $1,998,000 $241,425 $32,884 $258,075 $999,000 $499,500 Total Administrative Expenses Income from Operations S6,942,634 $13,873,197 $9,699,290 Rent Revenue $208,125 $457,054) ($248,929 $9,450.361 $2,362.590 Interest Expense Income from Continuing Operations before Taxes Income Tax Expense () $7,087.771 Net Income $2.77 Weighted Average Number of Common Shares Outstanding 2,557,500 Terry Co. Statoment of Cash Flows For Year Ended 12/31Year 3 Cash Flow from Operations S7,087,771 ($1,685,000) Change in Interest Payable Change in Wages Payable(166.500) $2.769.229 Net Cash Flow from Operations $9,857,000 Net Cash Flow from Investments ($12,654,000) Net Cash Flow from Financing S3,381,969 Net Increase (Decrease) in Cash $584,969 S3,330,000 $3,914,969