As part of his examination of the financial statements of the Marlborough Corporation for the year ended March 31, 19X1, Marion Romito, CPA, is reviewing the balance-sheet presentation of a \(\$ 1.2\) million advance to Franklin Olds, Marlborough's president. The advance, which represents 50 percent of current assets and 10 percent of total assets, was made during the year ended March 31, 19X1. It has been described in the balance sheet as "miscellaneous accounts receivable" and classified as a current asset.

Olds informs the CPA that he has used the proceeds of the advance to purchase 35,000 shares of Marlborough's common stock, in order to forestall a take-over raid on the company. He is reluctant to have his association with the advance described in the financial statements because he does not have voting control and fears that this will "just give the raiders ammunition."

Olds oifers the following four-point program as an alternative to further disclosure:

1. Have the advance approved by the board of directors. (This can be done expeditiously because a majority of the board members are officers of the company.)

2. Prepare a demand note payable to the company with interest of 7.5 percent (the average bank rate paid by the company).

3. Furnish an endorsement of the stock to the company as collateral for the loan. (During the year under audit, despite the fact that earnings did not increase, the market price of Marlborough common rose from \(\$ 20\) to \(\$ 40\) per share. The stock has maintained its \(\$ 40\) per share market price subsequent to year-end.)

4. Obtain a written opinion from the company attorney supporting the legality of the company's advance and the use of the proceeds.

Required:

a. Discuss the proper balance-sheet classification of the advance to Olds and other appropriate disclosures in the financial statements and footnotes.

b. Discuss each point of Olds' four-point program as to whether oin not it is desirable and as to whether or not it is an alternative to further disclosure.

c. If Olds refuses to permit furthei disclosure, what action(s) should the CPA take? Discuss.

d. In his discussion with the CPA, Olds warns that the raiders, if successful, probably will appoint new auditors. What consideration should the CPA give to this factor? Explain.