08 Oct Imagine that you are working as a financial accountant for Peyton Approved, and you have been charged with revising its financial information.

Imagine that you are working as a financial accountant for Peyton Approved, and you have been

charged with revising its financial information. The company has experienced tremendous growth in the

 

past three years, and it is now a well-known bakery chain for pet products. They have become a publicly

 

traded company and have several locations that they deliver to regionally.

 

You will find the company’s financial information in the Peyton Approved Balance Sheet and Income

 

Statement. This document will need revisions and appropriate notes added in order to prepare for the

 

year-end audit accordingly. In addition to ensuring that the balance sheet is ready for the year-end

 

audit, you will address other major areas of need, including:

 

? Assessing tax implications

 

? Evaluating and explaining stockholder equity

 

? Accounting for postretirement benefits (The amounts would be determined by actuaries.)

 

? Assessing impacts of leases

 

Peyton Approved Financial Information

 

Comprehensive income items

 

? Marketable securities on the balance sheet at a cost of $5,500,000 are available-for-sale

 

? Market value at the balance sheet date is $5,235,00

 

? Prepare the adjusting entry to record the unrealized loss and include in comprehensive

 

income

 

Tax information and implications

 

? $1,500 in meal and entertainment expenses show as a permanent difference for tax. Prepare

 

the necessary adjusting entry.

 

? The company uses straight line depreciation for book and MACRS depreciation for the tax return

 

? MACRS depreciation was $209,301 higher than book. Prepare the adjusting entry for the

 

deferred tax.

 

? There have been recent tax structure changes the could impact the company. Peyton Approved

 

has been a C Corp since the beginning of these changes. Peyton provides for taxes at 25% of

 

pretax income (20% Federal, 5% state).

 

Stockholder Equity

 

Peyton Approved prides itself on transparency with shareholders and investors. The company has added

 

two storefront locations and launched a new marketing campaign, which is estimated to bring in 20,000

 

new customers over the next 6 months.

 

The company expects this expansion will require an additional $1,000,000 of capital and generate an

 

additional $600,000 of after-tax profit. The options are:

 

1) Issuing an additional $1,000,000 of 10%, 100-par convertible preferred stock (same class as is

 

currently outstanding)

 

2) Issue an additional $1,000,000 of 8% convertible bonds (same terms as the existing issue)

 

3) $500,000 each of preferred stock and bonds

 

Determine the impact on earnings per share for each option.

 

Postretirement Benefits

 

Peyton Approved has revised its postretirement plan. It will now provide health insurance to retired

 

employees. Management has requested that you report the short- and long-term financial implications

 

of this.

 

? The company is currently employing 60, and actuaries estimate that the company has a pension

 

liability of $107,041.70.

 

? The estimated cost of retired employees’ health insurance is $43,718.91.

 

? Prepare adjusting entries for the pension liability and the health insurance liability

 

Leases

 

? Six ovens were rented on December 31, with $20,000 charged to rent expense. The lease runs

 

for 6 years with an implicit interest rate of 5%. At the end of the 6 years, Peyton will own them.

 

Make any necessary adjusting entries.

 

Other Items

 

? On December 31, 20XX, the company repaired a packaging machine at cost of $27,000.00. It is

 

expected that the repair will extend the life of the machine by four years. No depreciation is

 

necessary this year.

 

? The company spent $50,000 to obtain and defend a patent for its formula for dog treats. The

 

patent took effect on 1/1/20XX and provides 20 years of protection. The $50,000 amount was

 

incorrectly charged to Misc. Expense

 

? Make any necessary adjusting entries.

 

 

 

Overview: For Milestone One, which is due in Module Three, you will develop a portion of the workbook, notes to the financial statements, and a brief memo to

 

management explaining the impacts to stockholder equity and the impact of tax structures. You will build on this milestone in subsequent modules to create the

 

workbook and executive summary portions of your final project.

 

Prompt: First, review the Final Project Scenario document. Using your review of the scenario, begin your workbook and discuss the impacts in your management

 

brief, including impacts on stockholder equity and impacts based on changes to tax structure.

 

Note: Milestone One is a draft of some of the critical elements of the final project.

 

Specifically, the following critical elements must be addressed:

 

I. Workbook

 

A. Prepare adjusting entries for unrealized loss and tax issues.

 

II. Management Brief

 

A. Identify sources of other comprehensive income not included in net income.

 

B. Explain rationale for the inclusion as comprehensive income (as opposed to net income) of nondisclosure within notes.

 

C. Evaluate impacts of company goals and finances for their implications on stockholder equity, using financial information to support claims.

 

D. Evaluate impacts of company goals and finances for their implications on retained earnings per share, using financial information to support

 

claims.

 

E. Explain the impact of issuing preferred stock or debt for determining changes to equity structures.

 

F. Assess the impact of changes to current tax structure for articulating changes relevant to the company.