Quirpon Inc. (Quirpon) is a large mining company. In 2014, Quirpon wrote down $20,000,000 in costs that it incurred finding and developing certain mining properties. If Quirpon had not written down the $20,000,000 in costs, $4,000,000 in depreciation would have been expensed in each year from 2014 through 2018. The summarized financial statement information for the years 2014 through 2017 is:

Additional information:
• Quirpon has no preferred shares outstanding.
• The depreciation expense doesn't include the depreciation of the written-down assets and the write-down is not reflected in the presented information.
• Quirpon's tax rate is 25 percent.
• Assume that the writedown and any additional amortization expense do not affect Quirpon's tax expense.

a. Determine Quirpon's net income for 2014 through 2017, assuming that the
$20,000,000 write-down
(i) Occurred and
(ii) Did not occur. For
(ii) Depreciation of the assets must be expensed each year.
b. Calculate Quirpon's profit margin, return on assets, and return on equity, assuming that the Writedown
(i) Occurred and
(ii) Did not occur.
c. Should the writedown be considered permanent or transitory earnings? Explain.
d. As an equity investor in Quirpon, how would your evaluation of the company be affected by whether the writedown occurred versus whether the assets were amortized over their remaining life? In responding, you should consider permanent versus transitoryearnings.

  • CreatedFebruary 26, 2015
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