To practice recording contingent liabilities and reporting them in the financial statements.

At the beginning of Year 2, Terry was informed that a new city ordinance would require them to restore the woods behind their main factory if they intend to keep using it. The estimated cost of the restoration will be approximately $790,000 and must be done within the next 5 years or the factory will be shut down. At the time, Terrys board decided to wait until the beginning of Year 6 to start the restoration. Although the notice was received and the boards decision made at the beginning of the year, no journal entries have yet been made for this obligation. The factory was built 3 years ago when Terry was still a privately held company and is being depreciated using SL depreciation using the original estimate of a 15 year useful life. The depreciation for the building has already been recorded for Year 2. The restoration will not change the factorys salvage value.

Make the appropriate journal entries, if any, to account for the new liability (including any necessary changes to income tax expense).

In making your entries, assume that Terrys Internal Rate of Return is 5%. Make any necessary changes to the financial statements.

Terry Co. Multi-Step Income Statement For the Year Ended December 31, Year 2 Terry Co. Balance Sheet As of 12/31/Year 2 Year 2 Sales Revenue Year 1 $29,700,000 Assets $3,556,882 Sales Revenue Less: Sales Discounts Sales Returns Net Sales Revenue $356,400 $1,410,750 $1,767,150 $27,932,850 $914,000 $2,673,000 ($148,500) $3,589,600 $492,750 $371,250 $7,892,100 Cost of Goods Sold Cost of Goods Sold Gross Profit $1,485,000 $2,524,500 ($742,500) $4,158,000 $445,500 $297,000 $8,167,500 Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 2 Cash Flow from Operations Net Income Adjustments: Change in AIR ($742,500) Change in Inventory $568,400 Change in Prepaid Insurance ($47,250) Change in Prepaid Rent ($74,250) Depreciation & Amortization $1,782,000 Change in A/P ($1,283,172) Change in Income Tax Payable $264,240 Change in Unearned Revenue $297,000 Change in Wages Payable ($14,850) Net Cash Flow from Operations $16,208,255 $11,724,595 Current Assets Cash AR 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 Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets Operating Activities Selling Expenses Advertising Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense $1,188,000 $891,000 $2,079,000 $1,188,000 $891,000 $2,079,000 $749,618 $4,306,500 $556,875 $144,788 $408,375 $1,485,000 $243, 169 $3,267,000 $2,376,000 $8,464,300 ($4,132,300) $9,975,000 de tel kors ($1,188,000) ($5,223,000) Cash Flow from Investments Purchase of Land Purchase of Equipment Net Cash Flow from Investments $2,079,000 $2,376,000 $3,861,000 ($2,970,000) $5,346,000 $2,838,207 ($6,411,000) $1,299,375 $1,782,000 $256,163 $14,664 $115,088 $18,563 $222,750 $445,500 $20,391,600 Administrative Expenses Executive Salaries Expense Depreciation Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense Consulting and Legal Fees Utilities Expense Total Administrative Expenses Income from Operations $445,500 $16,038,000 Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing ($148,500) $1,782,000 ($100,000) $1,533,500 $3,708,603 $6,546,810 $5,177,785 Net Increase (Decrease) in Cash Cash, January 1, Year 2 Cash, December 31, Year 2 ($571,000) $1,485,000 $914,000 $1,782,000 $297,000 $445,500 $371,250 $148,500 $3,044,250 $92,813 ($189,338) Other Gains and Losses Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income ($96,525) $5,081,260 ($1,524,378) $3,556,882 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $498,828 Income Tax Payable $561,240 Unearned Revenue $742,500 Wages Payable $356,400 Current Portion of Loan Payable $148,500 Total Current Liabilities $2,307,468 Long-term Debt Loan Payable $742,500 Notes Payable $4,158,000 Total Long-term Debt $4,900,500 Total Liabilities $7,207,968 Stockholders' Equity omn Stock $3,400,000 ($1 par, 5,000,000 authorized, 3,400,000 outstanding) Additional Paid-In Capital $891,000 Retained Earnings $8,892,632 Total Stockholders' Equity $13,183,632 Total Liabilities and Stockholder's Equi $20,391,600 $891,000 $2,376,000 $3,267,000 $6,311,250 EPS $1.05 $3,400,000 $891,000 $5,435,750 $9,726,750 $16,038,000 Terry Co. Multi-Step Income Statement For the Year Ended December 31, Year 2 Terry Co. Balance Sheet As of 12/31/Year 2 Year 2 Sales Revenue Year 1 $29,700,000 Assets $3,556,882 Sales Revenue Less: Sales Discounts Sales Returns Net Sales Revenue $356,400 $1,410,750 $1,767,150 $27,932,850 $914,000 $2,673,000 ($148,500) $3,589,600 $492,750 $371,250 $7,892,100 Cost of Goods Sold Cost of Goods Sold Gross Profit $1,485,000 $2,524,500 ($742,500) $4,158,000 $445,500 $297,000 $8,167,500 Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 2 Cash Flow from Operations Net Income Adjustments: Change in AIR ($742,500) Change in Inventory $568,400 Change in Prepaid Insurance ($47,250) Change in Prepaid Rent ($74,250) Depreciation & Amortization $1,782,000 Change in A/P ($1,283,172) Change in Income Tax Payable $264,240 Change in Unearned Revenue $297,000 Change in Wages Payable ($14,850) Net Cash Flow from Operations $16,208,255 $11,724,595 Current Assets Cash AR 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 Equipment Accumulated Depreciation Total PPE Intangible Assets Patents, net Total Assets Operating Activities Selling Expenses Advertising Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense $1,188,000 $891,000 $2,079,000 $1,188,000 $891,000 $2,079,000 $749,618 $4,306,500 $556,875 $144,788 $408,375 $1,485,000 $243, 169 $3,267,000 $2,376,000 $8,464,300 ($4,132,300) $9,975,000 de tel kors ($1,188,000) ($5,223,000) Cash Flow from Investments Purchase of Land Purchase of Equipment Net Cash Flow from Investments $2,079,000 $2,376,000 $3,861,000 ($2,970,000) $5,346,000 $2,838,207 ($6,411,000) $1,299,375 $1,782,000 $256,163 $14,664 $115,088 $18,563 $222,750 $445,500 $20,391,600 Administrative Expenses Executive Salaries Expense Depreciation Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense Consulting and Legal Fees Utilities Expense Total Administrative Expenses Income from Operations $445,500 $16,038,000 Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing ($148,500) $1,782,000 ($100,000) $1,533,500 $3,708,603 $6,546,810 $5,177,785 Net Increase (Decrease) in Cash Cash, January 1, Year 2 Cash, December 31, Year 2 ($571,000) $1,485,000 $914,000 $1,782,000 $297,000 $445,500 $371,250 $148,500 $3,044,250 $92,813 ($189,338) Other Gains and Losses Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income ($96,525) $5,081,260 ($1,524,378) $3,556,882 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $498,828 Income Tax Payable $561,240 Unearned Revenue $742,500 Wages Payable $356,400 Current Portion of Loan Payable $148,500 Total Current Liabilities $2,307,468 Long-term Debt Loan Payable $742,500 Notes Payable $4,158,000 Total Long-term Debt $4,900,500 Total Liabilities $7,207,968 Stockholders' Equity omn Stock $3,400,000 ($1 par, 5,000,000 authorized, 3,400,000 outstanding) Additional Paid-In Capital $891,000 Retained Earnings $8,892,632 Total Stockholders' Equity $13,183,632 Total Liabilities and Stockholder's Equi $20,391,600 $891,000 $2,376,000 $3,267,000 $6,311,250 EPS $1.05 $3,400,000 $891,000 $5,435,750 $9,726,750 $16,038,000