PPE Writedown DTA/DTL Question (3 statements)

Based on the most helpful WSO content, here's a detailed breakdown of the PPE writedown and its impact on the three financial statements:

Income Statement (IS):

1. Revenue: $200
2. Writedown: -$50
3. Pretax Income: $150
4. Net Income: $120 (assuming a 20% tax rate, $150 - $30 in taxes)

Cash Flow Statement (CF):

1. Net Income: $120
2. Add-back Writedown: $50 (non-cash expense)
3. DTA Created: -$10 (since the writedown is not immediately tax-deductible, you create a deferred tax asset)
4. Net Cash: $160

Balance Sheet (BS):

Assets:

1. Cash: $160
2. PPE: $150 (after writedown)
3. DTA: $10
4. Total Assets: $320

Liabilities and Equity:

1. Previous Retained Earnings: $200
2. Net Income: $120
3. Total Liabilities and Equity: $320

Analysis:

• Option a): Incorrect. A DTL (Deferred Tax Liability) is not created because you are not underpaying taxes; rather, you are deferring the tax benefit.
• Option b): Correct. You create a DTA (Deferred Tax Asset) because the writedown is not immediately tax-deductible. The DTA represents the future tax benefit you will receive when the writedown is eventually recognized for tax purposes.
• Option c): Incorrect. The correct accounting treatment involves creating a DTA.

Conclusion:

The correct analysis is Option b). You make a DTA because the writedown is not immediately tax-deductible, and you will receive a tax benefit in the future.

Sources: Write Down of PPE by 100, DCF Modeling Course ~ Pre-training text.pdf, Difficult Accounting Technical - IBD, TRICKY Enterprise Value Technical Question, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1