Question

Fiscal 2017 was an outstanding year for Esterhazy Inc. (Esterhazy). For a variety of reasons, the company's sales surged and net income was going to exceed financial analysts' expectations by more than 20 percent or $13,000,000. Esterhazy's management recognized that the high earnings for the year were due to some unusual business circumstances and weren't likely to be repeated in the foreseeable future.
Before finalizing its financial statements, Esterhazy's management evaluated the company's assets and determined that several were overvalued. As a result, Esterhazy's assets were written down by a total of $12,000,000 so that the assets wouldn't be over stated on the balance sheet. All of the assets written down were being depreciated and their remaining useful lives ranged between five and eight years. Esterhazy is a public company that is traded on a Canadian stock exchange.

Required:
a. Explain the effect of the writedown on the 2017 financial statements as well as the implications for subsequent years' financial statements.
b. Explain how users of the financial statements would be affected by the writedown and how the financial statements should be interpreted as a result of recording the writedown.
c. Why do you think Esterhazy chose to write down the assets?
d. Does it matter that Esterhazy wrote down these assets? Explain.



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  • CreatedFebruary 26, 2015
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