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ACC 309: 5-1 Final Project Milestone Two
Southern New Hampshire University
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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).
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
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the increase because new hires will subsequently become eligible for pension plans as well
as a rise in salary 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. aa
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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.
