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ACC 309: 5-1 Final Project Milestone Two
Southern New Hampshire University
June 5,2022
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According to U.S. GAAP, a capital lease refers to a lease that significantly transfers all the
risks and benefits of ownership to the lessee from the lessor. In an economic sense, it can be
considered a purchase transaction for the lessee and a sale for the lessor (Kieso et al., 2019). In
simple words, it serves as an agreement in which the lessee acquired an asset at the lease’s end. In
order to meet a capital lease’s specifications, the agreement must offer purchase options, the term
should be equal to 75 % of the estimated economic life relating to the leased property, and the
minimum payment’s present value must be equal to 90 % or more of the fair value (Kieso et al.,
2019). Peyton Approved fulfills the criteria because it has leased 6 ovens for a period of 6 years at
an implicit interest rate of 5 %. The annual payment amounts to $ 20,000, and after 6 years, the
business will own its ovens. The actual capital lease obligation is $ 106,589.54, which has been
debited to ‘Baking Equipment’ and credited to the ‘Leased Liability’ in the adjusting entries. Then
the annual payment is credited to rent expenses and debited to depreciation expenses. The
company has to account for interest charges. The main benefit of such a capital lease is that by
making claims for the depreciation and interest rate, the firm’s taxable income will reduce (Kieso
et al., 2019). a
Postretirement plans
Peyton Approved currently has 60 employees that have pension plans. Their estimated
pension liability is $ 107,041.79. The firm accounts for the pension by debiting the ‘pension
expense’ and crediting the ‘accrued pension liability account.’ Peyton Approved also has an
estimated $ 43,718.91 in postretirement health benefits. It is accounted for by debiting ‘Retired
Employees Health Insurance account’ and crediting ‘Accrued Employees Health Insurance
account.’ The company will have to consider the liability relating to both the increase because
new hires will subsequently become eligible for pension plans as well as a rise in salary
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throughout their employment year. With the increase in retired employees, Peyton’s
postretirement benefits will rise. The other key factors are interest and service cost. In pension, the
interest element is projected off the predicted benefit obligation, which is interlinked with the
expected level of future compensation (Kieso et al., 2019). On the contrary, the service costs are
related to the earned benefits during a year or the time of employment. When it comes to the
postretirement benefits expenses, the interest is based on the obligation relating to the
accumulated postretirement benefits. a
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References
Kieso, D. E., Weygandt, J. J., Warfield, T. D., Wiecek, I. M., & McConomy, B. J. (2019).
Intermediate Accounting, Volume 2. John Wiley & Sons.
