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:

QUESTION TO ANSWER: I. Workbook A. Prepare adjusting entries for unrealized loss and tax issues.

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 retirement 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. Leases O 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. 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. PEYTON APPROVED As of December 31, 2017 Cr 5 2 2 7 2 2 2 Accumulated Depreciation 1,555,212.85 1,555,212.85 250,203.31 3 Current Portion of Bonds Payable Income Taxes Currently Payable Accrued Pension Liability 2 2,213,122.59 2,213,122.59 Beginning Retained earnings 33,881,157.15 124,795.80 33,881,157.15 124,795.80 Cost of Goods Sold Bake 10,954,907.36 3 2 2 2 Repairs and Maintenance 7 9 Retired Employees Health Ins Unrealized Gain/(Loss) on Marketable Securities Held for Sale 4,168,472.62 4,168,472.62 46,666,780.08 46,666,780.08 46,666,780.08 46,666,780.08 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 retirement 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. Leases O 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. 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. PEYTON APPROVED As of December 31, 2017 Cr 5 2 2 7 2 2 2 Accumulated Depreciation 1,555,212.85 1,555,212.85 250,203.31 3 Current Portion of Bonds Payable Income Taxes Currently Payable Accrued Pension Liability 2 2,213,122.59 2,213,122.59 Beginning Retained earnings 33,881,157.15 124,795.80 33,881,157.15 124,795.80 Cost of Goods Sold Bake 10,954,907.36 3 2 2 2 Repairs and Maintenance 7 9 Retired Employees Health Ins Unrealized Gain/(Loss) on Marketable Securities Held for Sale 4,168,472.62 4,168,472.62 46,666,780.08 46,666,780.08 46,666,780.08 46,666,780.08