Question

Happy, Inc. is negotiating a loan for expansion purposes and the bank requires audited financial statements. Before closing the accounting records for the year ended December 31, 2017, Happy's controller prepared the following comparative financial statements for 2017 and 2016:

Happy, Inc.

Balance Sheets December 31, 2017 and 2016
	2017	2016
Cash ......................................	$  550,000	$ 300,000
Investment securities (reported at market;   cost, $142,000) .........................	156,000	0
Accounts receivable .......................	974,000	784,000
Allowance for doubtful accounts ...........	(100,000)	(64,000)
Inventories ...............................	850,000	770,000
Property and equipment ....................	620,000	434,000
Accumulated depreciation ..................	(300,000)	(242,000)
Total assets ............................	$2,750,000	$1,982,000
Accounts payable ..........................	$  180,000	$  154,000
Accrued expenses ..........................	160,000	40,000
Note payable, 5-year ......................	600,000	600,000
Estimated contingent liability ............	200,000	0
Common stock, $10 par .....................	420,000	420,000
Additional paid-in capital ................	260,000	260,000
Retained earnings .........................	930,000	508,000
Total liabilities & owners' equity ......	$2,750,000	$1,982,000

Happy, Inc. Income Statements For the Years Ended December 31, 2017 and 2016
	2017	2016
Net sales .................................	$3,160,000	$2,500,000
Operating expenses:
Cost of sales .............................	$1,510,000	$1,380,000
Selling & administrative ..................	984,000	730,000
Depreciation ..............................	58,000	36,000
Estimated loss from lawsuit ...............	200,000	0
	$2,752,000	$2,146,000
Operating income ..........................	$  408,000	$  354,000
Unrealized gain on investment securities ..	14,000	0
Net income ................................	$  422,000	$  354,000

During the audit, the following additional information was obtained:

(a)	The investment portfolio consists of investments in trading securities with a total market value of $156,000 at December 31, 2017. The securities were purchased February 3, 2017, at a cost of $142,000.
(b)	As a result of errors in physical count, inventories were overstated by $30,000 at December 31, 2017.
(c)	On January 2, 2017, the cost of equipment purchased for $80,000 was mistakenly charged to repairs and maintenance. Happy depreciates this type of equipment over a 5-year life using the straight-line method, with no residual or salvage value.
(d)	Happy was named as a defendant in a lawsuit in October 2017. Happy's counsel is of the opinion that Happy has a good defense and does not anticipate any impairment of Happy's assets or that any significant liability will be incurred. However, Happy's counsel admits that loss of the suit is "possible." Happy's management wished to be conservative and established a loss contingency of $200,000 at December 31, 2017.
(e)	On January 24, 2016, before the 2017 financial statements were issued, Happy was notified that one of its largest customers had filed for bankruptcy as the result of a flood that destroyed a substantial portion of the company's assets on January 16, 2016. The customer's accounts receivable balance at December 31, 2017, was $144,000.
(f)	$100,000 of 5-year notes payable will mature September 30, 2016. In view of Happy's plans for expansion, management is seriously considering refinancing the notes when they become due.
*	Prepare a properly classified balance sheet for Happy, Inc., as of December 31, 2017. (Income tax considerations should be ignored.)
*	Identify the events and other information that should be disclosed in the notes to Happy’s financial statements. (Do not prepare the notes.)

Answer 1

1. For the purpose of convenience in understanding the effects of adjustments are given directly to the balance sheet as separate line items.

Balance sheet after such adjustments is as below:-

Balance Sheets
as at December 31, 2017
Pariculars	Amount
Non Current Asssts
Property and equipment ....................	6,20,000
Add: machinery	80,000
Investment securities (reported at market;	1,56,000
cost, $142,000) .........................
Current Assets
Cash ......................................	5,50,000
Accounts receivable .......................	9,74,000
Inventories ...............................	8,50,000
Less Overstated	-30,000
Total assets ............................	32,00,000
Owner's Equity
Common stock, $10 par .....................	4,20,000
Additional paid-in capital ................	2,60,000
Retained earnings .........................	9,30,000
Less stock overstated	-30000
add: machinery	80000
Less; Depreciation on Machinery	-16000
Other Liabilities
Allowance for doubtful accounts ...........	1,00,000
Accumulated depreciation ..................	3,00,000
add: depreciation on machinery	16,000
Accounts payable ..........................	1,80,000
Accrued expenses ..........................	1,60,000
Note payable, 5-year ......................	6,00,000
Estimated contingent liability ............	2,00,000
Total liabilities & owners' equity ......	32,00,000

2. Regarding the notes

a. As there are chance of loss of suit such amount must be disclosed in contingent liabilit.

b. Also disclosure of bad debts occuring due to insolvency of customer musyt be mentioned.

Note: Refinancing of notes payable is a business decision which need not be mentioned in notes.

For any other clarification kindly write in comments

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