The Case of Lancaster Electronics—Types of Disclosure

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Lancaster Electronics produces electronic components for sale to
manufacturers of radios, television sets, and phonographic systems. In
connection with his examination of Lancaster’s financial statements for
the year ended December 31, 2011, Dan Olds, CPA, completed fieldwork two
weeks ago. Mr. Olds is now evaluating the significance of the following
items for preparing his auditor’s report. Except as noted, none of
these items has been disclosed in the financials or footnotes.

  1. Recently, Lancaster interrupted its policy of paying cash
    dividends quarterly to its stockholders. Dividends were paid regularly
    through 2009, discontinued for all of 2010 to finance equipment in the
    company’s new plant, and resumed in the first quarter of 2011. In the
    annual report, dividend policy is to be discussed in the president’s
    letter to stockholders.
  2. A 10-year loan agreement, which the company entered into three years
    ago, provides that dividend payments may not exceed net income earned
    after taxes subsequent to the date of agreement. The balance of retained
    earnings at the date of the loan agreement was $298,000. From that date
    through December 31, 2011, income after taxes was totaled 360,000. Cash
    dividends have totaled $130,000. Based on this data, the staff auditor
    assigned to this review concluded that there was no retained earnings
    restriction at December 31, 2011.
  3. The company’s new manufacturing plant building, which cost $600,000
    and has an estimated life of 25 years, is leased from the Sixth National
    Bank in annual rental of $100,000. The company is obligated to pay
    property taxes, insurance, and maintenance. At conclusion of its 10-year
    non-cancellable lease, the company has the option of purchasing the
    property for $1. In Lancaster’s income statement, the rental payment is
    reported on a separate line.
  4. A major electronics firm has introduced a line of products that will
    compete directly with Lancaster’s primary line, which is now being
    produced in the specially designed new plant. Because of manufacturing
    innovations, a competitor’s line will be of comparable quality but
    priced $.50 below Lancaster’s line. The competitor announced its new
    line during the week following completion of its fieldwork. Mr. Olds
    read the announcement in the newspaper and discussed the situation by
    telephone with Lancaster executives. Lancaster will meet the lower
    prices with prices that are high enough to cover viable manufacturing
    and selling expenses but will permit recovery of only a portion of fixed
    costs.

Required:
For each of the preceding items, discuss any additional disclosures in
the financial statements and footnotes that the auditor should recommend
to its clients which are outlined in Schroeder, R.G., Clark, M.W, &
Cathey, J.M. (2013) Chapter 17. (The cumulative effect of the four items
should not be considered.)

Your well-written paper must be 2-3 pages, in addition to title and
reference pages. The paper should be formatted according to the apa standards Cite at least two peer-reviewed sources, in addition to the required reading for the module.

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