Question: assuming straight-line depreciation of 5 years, how does the effect from writing up the value of an asset by $100 during acquisition flow through the 3 statements?
My interpretation (which does not balance the balance sheet, looking for critique):
Instantly a DTL of $40 is created on the balance sheet to recognize the fact that book taxes will be lower than actual taxes by $40 over the course of the depreciation of the asset. This DTL will be reversed during the 5 years of straight-line depreciation.
Income statement: pre-tax income falls by $20 as annual depreciation is $40 vs tax depreciation of $20. Net income falls by $12 and DTL is reduced by $8.
Cash flow statement: net income falls by $12, but add back the $20 in increased depreciation, cash flow is up by $8.
Balance sheet: cash is up by $8 and asset is up by $80; equity falls by $12 and DTL is at $32. Does not balance
Investment Banking Interview Course
- 7,548 questions across 469 investment banks. Crowdsourced from over 500,000 members.
- Technical, behavioral, networking, case videos, templates. All included.
- Most comprehensive IB interview course in the world.