Selected information from Ingot Company’s financial statements for the year ended December 31, 2004, was as follows prior to the consideration of its impaired asset write-down (in $): Cash 120,000 Accounts Payable 290,000 Accounts Receivable 200,000 Long-term Debt 740,000 Inventory 300,000 Common Stock 800,000 Property Plant & Eq. (net) 1,700,000 Retained Earnings 490,000 Total Assets 2,320,000 Total Liab. & Equity 2,320,000 Ingot Company’s excavation machine is permanently impaired. Its purchase price was $1,600,000 and its accumulated depreciation was $800,000 through 2004. The present value of its future cash flows is $500,000. The write-down of the excavation machine will cause Ingot’s total debt ratio (total debt-to-total capital) to: A) increase from 0.44 to 0.48. B) decrease from 0.44 to 0.40. C) increase from 0.44 to 0.51. D) be unchanged. The correct answer was C) increase from 0.44 to 0.51. The write-down of the excavation machine in the amount of ((($1,600,000 − $800,000) − $500,000) =) $300,000 decreases retained earnings from $490,000 to $190,000. The total debt to equity ratio increases from (($290,000 + $740,000) / ($290,000 + $740,000 + $800,000 + $490,000) =) 0.44 to (($290,000 + $740,000) / ($290,000 + $740,000 + $800,000 + $190,000) =) 0.51. Why is the write-down value $300,000? It’s book value is $800,000, it’s PV is $500,00, yet the write-down is $300,000?
My guess would be inventory is carried at lower of historical cost or PV of undiscounted future cash flows. Can someone else confirm?
The write down is made by the amount of the impairment. Which is 800k-500k