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PP&E with a positive book value of $30,000 was destroyed in a fire. Why does this...

PP&E with a positive book value of $30,000 was destroyed in a fire.

Why does this transaction cause non-current assets, equity, operating income, and net income to go down?

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Answer #1

PP&E with a positive book value of $30,000 was destroyed in a fire.

This event will be reported as an operating loss of $30,000 on the income statement.

The loss will reduce the operating income by $30,000 and as a result the net income will also get reduced by the same amount because operating income is a part of net income.

When net income reduces by $30,000, the retained earnings that is a part of the equity will get reduced by the same amount. As a result the equity will decrease by $30,000.

On the other hand, PP&E which is a major part of the non-current assets will reduce by $30,000 because these are destroyed and are of no use now. As a result of reduction in the PP&E the overall non-current assets will also get reduced.

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