(Interpreting a write-down, LO 4, 6, 7,.9) Fiscal 2005 was an outstanding year for Schmevan Inc. (Schmevan). For a variety of reasons, the company’s sales surged and net income was going to exceed financial analysts’ expectations by more than 20%

or $13,000,000. Schmevan’s management recognized that the high earnings during the year were due to some unusual business circumstances and were not likely to be repeated in the foreseeable future.

Before finalizing its financial statements, Schmevan’s management evaluated the company’s assets and determined that several were overvalued. As a result, Schmevan’s assets were written down by a total of $12,000,000 so that the assets would not be reported on its books at more than their market value. All of the assets written down were being amortized, and their remaining useful lives ranged between five and eight years. Schmevan is a public company that is traded on a Canadian stock exchange.

Required:

a. Explain the effect on the current year’s financial statements, as well as the implications for future years’ financial statements, of the write-down.

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 write-down.

c. Why do you think Schmevan chose to write down the assets?

d. Does it matter that Schmevan wrote down these assets? Explain.