McMaster, Inc., a nonpublic enterprise, 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, 2012, McMaster's controller prepared the following comparative financial statements for 2012 and 2011:

 McMaster, Inc.

Balance Sheets

December 31, 2012, and 2011

 2012  2011

Cash ......................................$  550,000$ 300,000

Investment securities (reported at the market;

cost, $142,000) .........................

156,000

0

Accounts receivable .......................974,000784,000

Allowance for doubtful accounts ...........(100,000)(64,000)

Inventories ...............................850,000770,000

Property and equipment ....................620,000434,000

Accumulated depreciation ..................(300,000)(242,000)

Total assets ............................$2,750,000$1,982,000

Accounts payable ..........................$  180,000$  154,000

Accrued expenses ..........................160,00040,000

Note payable, 5-year ......................600,000600,000

Estimated contingent liability ............200,0000

Common stock, $10 par .....................420,000420,000

Additional paid-in capital ................260,000260,000

Retained earnings .........................930,000508,000

Total liabilities & owners' equity ......$2,750,000$1,982,000

 McMaster, Inc.

Income Statements

For the Years Ended December 31, 2012, and 2011

20122011

Net sales .................................$3,160,000$2,500,000

Operating expenses:

Cost of sales .............................$1,510,000$1,380,000

Selling & administrative ..................984,000730,000

Depreciation ..............................58,00036,000

The estimated loss from lawsuit ...............200,0000

$2,752,000$2,146,000

Operating income ..........................$  408,000$  354,000

Unrealized gain on investment securities ..14,0000

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, 2012. The securities were purchased on February 3, 2012, at a cost of $142,000.

(b)As a result of errors in the physical count, inventories were overstated by $30,000 on December 31, 2012.

(c)On January 2, 2012, the cost of equipment purchased for $80,000 was mistakenly charged to repairs and maintenance. McMaster depreciates this type of equipment over a 5-year life using the straight-line method, with no residual or salvage value.

(d)McMaster was named as a defendant in a lawsuit in October 2012. McMaster's counsel is of the opinion that McMaster has a good defense and does not anticipate any impairment of McMaster's assets or that any significant liability will be incurred. However, McMaster's counsel admits that loss of the suit is "possible." McMaster's management wished to be conservative and established a loss contingency of $200,000 at December 31, 2012.

(e)On January 24, 2013, before the 2012 financial statements were issued, McMaster 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, 2013. The customer's accounts receivable balance at December 31, 2012, was $144,000.

(f)$100,000 of 5-year notes payable will mature September 30, 2013. In view of McMaster's plans for expansion, management is seriously considering refinancing the notes when they become due:

(1)Prepare a properly classified balance sheet for McMaster, Inc., as of December 31, 2012. (Income tax considerations should be ignored.)

(2)Identify the events and other information that should be disclosed in the notes to McMaster's financial statements. (Do not prepare the notes.)

Answer rating: 100% (QA)

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