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You have completed your audit of Carter Corporation and its consolidated subsidiaries for the year ended December 31, 2004, and are satisfied with the results of your examination. You have examined the financial statements of Carter for the past three years. The corporation is now preparing its annual report to shareholders. The report will include the consolidated financial statements of Carter and its subsidiaries and your short-form auditor's report. During your audit, the following matters came to your attention.

1. The Internal Revenue Service, which is examining the corporation's 2002 federal income tax return, questions the amount of a deduction claimed by the corporation's domestic subsidiary for a loss sustained in 2002. The examination is still in process, and any additional tax liability is indeterminable at this time. The corporation's tax counsel believes that there will be no substantial additional tax liability.

2. A vice president who is also a stockholder resigned on December 31, 2004, after an argument with the president. The vice president is soliciting proxies from stockholders and expects to obtain sufficient proxies to gain control of the board of directors so that a new president will be appointed. The president plans to have a footnote prepared that would include information of the pending proxy fight, management's accomplishments over the years, and an appeal by management for the support of stockholders.

a. Prepare the footnotes, if any, that you would suggest for the foregoing listed items.
b. State your reasons for not making disclosure by footnote for each of the listed items for which you did not prepare a footnote.

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1).The company's income tax return for the year 2002 is being examined by the Internal Revenue Service. The company's domestic subsidiary has claimed a deduction for a loss incurred by it in 2002 and this deduction is being questioned by the IRS. The examination of the loss is still in progress and it is not possible to determine if any further tax liability will be incurred. It is understood that not withstanding the challenge, there may not be any significant increase in the liability for the company.

2)There is an impending takeover bid and a proxy contest is likely to take place. The cost of the proxy contest will add to the costs incurred by the company in the ...

Solution Summary

This answer provides you an excellent discussion on Footnotes