Basic question about shareholders equity
Hi all, going through the questions of Long Lived assets I realized I am missing a basic understanding of shareholders equity. Below an example to explain it:
-Let’s say I have an asset with a carrying amount of “Ca”. An impairment happens for the value of “i”, so the new book value of the asset is “Ca-i”. Applying the accounting equation (Assets-Liabilities=Equity), my Equity just went down by an amount of “i”.
Now let’s take another route. This impairment causes a loss in the Income Statement of “i”. If there is a tax rate of “tr”, the Net Income will be lowered by i*(1-tr). In consequence, the Retained Earnings will get reduced by i*(1-tr) and the Equity will also get reduced by i*(1-tr).
Here is my basic question: in the second way to do it, where is the remaining amount of the impairment (i*tr)? Obviously the reduction in Retained Earnings is smaller than the reduction in the value of the asset calculated in the beffining, so the Equity calculated through the second method wil be higher than the equity calculated by the first.
What am I doing wrong?
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