Question

****Only Need 6 & 7 answered ****

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. Terry’s 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 Terry’s 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 management’s 401(k) and $520,506 to the designer’s 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 plan’s 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 Terry’s 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 Terry’s board should respond to management’s 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. 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

Answer 1

6)I think Terry creditors will be happy with the exchange as Terry's company is having good profits and also they have enough funds to pay to the creditors.Net income of 7 million is more than enough to pay off entire loan and bond payable of 5 million so there is no reason for Terry creditors to be dissatisfied with the exchange.

7)Terry board should make management employees happy with the current 401(k) scheme

email that board could send to management team

Dear employees,

Our organisation has agreed to provide pension for management workers under 401(k) scheme which has numerous tax benefits also .The organisation has also paid 1.5 million dollars to management workers pension this year.So since the company is planning more stock acqusitions the organisation is short of funds and your appeal to get a defined pension scheme will certainly be considered next year.