(Determining the effect of a big bath on future earnings, LO 1, 2) Quirpon Inc. (Quirpon) is a large mining company. In 2001 Quirpon wrote down $10,000,000 in costs that it incurred finding and developing certain mining properties. If Quirpon had not written down the $10,000,000 in costs, $2,000,000 in amortiza- tion would have been expensed in each year from 2001 through 2005. The sum- marized financial statement information for the years 2001 through 2004 is:

Additional information:
¢ Quirpon has no preferred shares outstanding.
e The amortization expense does not include the amortization of the writtendown assets and the write-down is not reflected in the presented information.
e Quirpon’s tax rate is 25%.
e Assume that the write-down and any additional amortization expense do not affect Quirpon’s tax expense.
Required:

a. Determine Quirpon’s net income for 2001 through 2004, assuming that the $10,000,000 write-down (i) occurred and (ii) did not occur. For (ii) amortization of the assets must be expensed each year.

b. Calculate Quirpon’s profit margin, return on assets, and return on equity, assuming that the write-down (i) occurred and (ii) did not occur.

c. Should the write-down 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 write-down occurred versus if the assets were amortized over their remaining life? In responding you should consider permanent versus transitory earnings.

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Revenue Quirpon Inc. Summarized Financial Statement Information (in thousands of dollars) Operating expenses Amortization expense Interest expense Income tax expense Net income 2000 Total assets $37,000 Total shareholders' equity $25,000 2001 2002 2003 2004 12,000 $30,500 $28,000 $31,000 $33,000 11,000 13,000 14,500 7,000 1,200 $2,575 $2,150 $2,350 $2,375 ($7,725) $6,450 $7,050 $7,125 $34,725 $41,175 $48,225 $55,350 $22,725 $29,175 $36,225 $43,350 7,200 7,400 7,800 1,200 1,200 1,200