Assume a US company performs the ceiling test at the end of the second quarter using end-of-quarter
Question:
Assume a US company performs the ceiling test at the end of the second quarter using end-of-quarter prices, which are $90/bbl. As a consequence of the test, the company books a ceiling write-down of $1,000,000. By the end of the year the price has increased to $125/bbl. At that price no write-down would be required.
What action should the company take to “correct” the previously recorded write-down?
a. They can reverse the previously booked $1,000,000 write-down.
b. They can adjust the accumulated DD&A account and effectively restore the $1,000,000 previously written off.
c. Nothing can be done.
d. The previous write-down can be restored only if doing so does not significantly affect the company’s DD&A rate.
e. None of these applies.
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