IB Interview Accounting Question Help

Is the answer for this PP&E question in BIWS incorrect? Why is PP&E reduced by 90? 

At the end of Year 2, the factories all break down and their value is written down to $0. The 
loan must also be paid back now. Walk me through how the 3 statements ONLY from the start of Year 2 
to the end of Year 2.

After 2 years, the value of the factories is now $80 if we go with the 10% Depreciation per year 
assumption. It is this $80 that we will write down on the 3 statements. Also, don’t forget about 
the Interest Expense – it still needs to be paid in Year 2.

Income Statement: We have $10 worth of Depreciation and then the $80 Write- Down. We also have $10 
of additional Interest Expense, so Pre-Tax Income is down by $100. Net Income is down by $60 at a 
40% tax rate.

Cash Flow Statement: Net Income is down by $60 but the Write-Down and Depreciation are both 
non-cash expenses, so we add them back and cash flow is
up by $30 so far.

Investment Banking Interview Guide Access the Rest of the Interview Guide
48 / 73
There are no changes under Cash Flow from Investing, but under Cash Flow from Financing there is a 
$100 charge for the loan payback – so Cash Flow from Financing falls by $100.

Overall, cash at the bottom decreases by $70.
Balance Sheet: Cash is now down by $70, and PP&E has decreased by
$90, so the Assets side is down by
$160.
On the other side, Debt is down
$100 since it was paid off, and since
Net Income was down by $60, Shareholders’ Equity is down by $60. Both sides
are down by $160 and balance.