Overview: 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).

Potentially Dilutive Securities

Peyton has the following potential dilutive securities:

$4,000,000 in bonds payable 10%, 20 year. Every $1,000 bond can convert to 5 shares of common stock. Preferred stockEvery share issued can convert to 1 share of common stock.

Expansion Plans

The company is adding two storefront locations and launching a new marketing campaign, which is estimated to bring in 20,000 new customers over the next six 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 financing options are: 1. Issuing an additional $1,000,000 of 10%, 100-par convertible preferred stock (same class as is currently outstanding) 2. Issuing an additional $1,000,000 of 8% convertible bonds (same terms as the existing issue) 3. Issuing $500,000 each of preferred stock and bonds

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 initial entry recorded the repair to the repair and maintenance account.
• 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.

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