If $10 of deferred revenue is written, what is the effect on the 3 financial statements? What are the journal entries?
I've combed this forum and Googled the treatment of deferred revenue write-downs and found a bunch of different answers. Anyone confidently know the answer?
How can you ever “write down” DR?
Lol that was my reaction but someone supposedly got this question in a MF PE interview. Apparently it can happen in M&A. This link explains it, but not how you account for it: http://mikesandrik.com/deferred-revenue-treatment-in-acquisitions/
IS: $10 gain in pretax income (write-down of liabilities), 40% tax, N.I. Goes up by $6 CFS: N.I. Goes up by $6, write-down is non-cash so subtract $10 = outflow of $4 BS: Cash goes down by $4, N.I. Makes R.E goes up by $6 then DR goes down by $10.
It's so strange to me how it's a gain because you're just keeping the cash customers paid you and recording it as a gain instead of revenue - but I guess that logically makes the most sense since it's essentially free money if you longer have the liability of having to deliver a good or service. And your profile says you're in M&A so if that's accurate then I trust you haha
I think whoever asks this question doesn't ask it in context of M&A scenario. (saying 3statements) It would've made more sense just saying what happens to 3 statement if DR goes down by $10
Sure, but then that's not a "write-down." If DR goes down (outside of acquisitions) that just means revenue is recognized, so in that case yes, your pretax income (revenues) increases.
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