Running Head: ACC 309 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o 1
3-1 Final Project Milestone One
ACC309
Southern New Hampshire University
ACC 309 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o 2
Other comprehensive income of the business
Since the Peyton Approved business has expanded and evolved, its way of accounting has
also changed. The business needs to analyze as well as address two varying income areas,
including net income and other comprehensive income. Net income can be ascertained by adding
all the revenue for a period and subtracting the total expenses. However, the computation of
comprehensive income involves the addition of the net income and all the comprehensive income
elements like marketable securities, unrealized revenue, as well as unrealized gains or losses as
per the GAAP and IFRS principles (Bragg, 2019). For the specific accounting period, the
business recorded its marketable securities at the cost of $ 5,000,000, which was available for
sale. But its actual market value is $ 5,235,000. So, there is a variance of $ 265,000, which has
been recorded under the head – ‘unrealized gains or losses on marketable securities for sale.’
As the marketable securities have not been sold and are on sale, these securities, and the
associated gain will be considered as other comprehensible income. These elements are regarded
to be unrealized since the transaction is not yet complete. After the sale of the securities, the gain
can be realized by Peyton Approved, which can then become a part of the net income
computation (Bragg, 2019).
Shareholder’s Equity
Shareholder’s equity refers to the residual interest belonging to the shareholders in the
assets of a business entity after the deduction of liabilities (Whalen, Jones, and Pagach, 2017). It
can also be defined as the amount of funds that remain after all the dividends have been paid.
Recently, the Peyton Approved business expanded its business by opening two new stores and
launching a new marketing campaign to attract an additional number of businesses towards it.
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The business intends to add around 20,000 new customers within the next 6 months with the help
of the strategic move. For executive expansion at the comprehensive level, Peyton needs an extra
$ 1,000,000 in the capital, and it expects to generate an additional $ 600,000 after taxes. There
are three options that the business can choose while making the final decision.
The first option involves issuing $ 1,000,000 of 10 % 100-par convertible preferred
shares. The key advantages of this method include an increase in shareholder’s equity, earnings
per share (EPS) for the financial year in addition to payment of $ 100,000 in dividends. This
dividend amount will arise from $ 100,000 additional profit, which will still ensure that $
500,000 remains as after-tax profits (Xu & Li, 2020). The second option involves issuing an
additional $ 1000,000 of 8 % convertible bonds. Such bonds will have an interest of $ 80,000 that
has to be paid out. The interest payment will be subtracted from the after-tax profit of $ 600,000.
The company will still have a $ 520,000 profit. The use of convertible bonds by Peyton
Approved will enable the purchaser to convert these bonds into a specific number of common
equity shares (Whalen, Jones, and Pagach, 2017). The advantage of the approach for the business
involves a lower interest rate which will help in saving money. In case the bonds are converted
into common shares, it can lead to the dilution of the firm’s retained earnings. The final option
involves issuing $ 5,00,000 each of bonds as well as preferred shares (Spiceland et al., 2018).
This option will not alter the profits; however, it may still lead to the dilution of the retained
earnings in case the shares and bonds are converted.
Retained Earnings Per Share
Retained earnings per share refer to a firm’s earnings that it keeps after paying out all the
dividends. The amount that remains with the business is plowed back for carrying out the
ACC 309 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o 4
operations or increasing the sales and profitability by expanding the business (McClure, 2012).
Peyton Approved will be able to acquire additional capital that is needed by issuing convertible
bonds and preferred shares. However, this decision can also lead to the dilution in shareholder’s
equity and lead to a decline in the retained earnings per share in case the shares and bonds are
converted into common shares. Such a conversion will increase the total weighted shares and
reduce the earnings per share.
Preferred Shares or Debt
Preferred share an be a bonus for Peyton Approved as it will help to acquire additional
capital for the intended business expansion. The firm will have to pay a higher dividend, but it
can achieve its goals of getting additional finance. But it can cause dilution for existing
shareholders as the net income will be shared among more shares (Investopedia, 2018). Debt
financing is another option that Peyton Approved can consider. This option arises when a firm
sells its fixed income products lie, bills or bonds to investors to seek needed capital for the
expansion of operations (Chen, 2019). It will enable the business to acquire funds that can impact
its cash flow. However, it will have the financial obligation of paying back the principal amount
within the specified date, or else it will be in default, and its reputation and expansion objective
could be affected. o o
Current Tax Structure
The Peyton Approved business uses two diverse depreciation methods, namely the
straight-line method and the MACRS method. The first method is used for books, whereas the
second method is used for tax returns. At present, there is a deferred tax expense as well as a
deferred tax liability amounting to $ 52,325.25 since the MACRS depreciation method is $
ACC 309 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o 5
209,301 more than the book value. Recently there have been certain changes to the tax structure
that may instantly impact the business entity. In case there is an increase in the current tax rate, it
can lead to a decline in the net income of the Peyton Approved business.
References
Spiceland, J. D., Nelson, M. W., & Thomas, W. (2018). Intermediate accounting (pp. 129-130).
New York, NY: McGraw-Hill Education.
Xu, X., & Li, J. (2020). Asymmetric impacts of the policy and development of green credit on the
debt financing cost and maturity of different types of enterprises in China. Journal of
Cleaner Production, 264, 121574.
