Bayside Ltd. owns a piece of land it had purchased in 2016 for $400,000. When they started to develop the land in 2017, they discovered that there were environmental problems with the land. It is now estimated to be worth only $150,000. Which of the following is the correct way to account for this?

Question

Quizplus · Accepted Answer

When a company discovers that an asset's value has declined, they must write down the asset to its new estimated fair value and recognize a loss on the income statement. This process is called impairment accounting. In this case, Bayside Ltd. should write down the land to its new estimated value of $150,000 and recognize a loss on the income statement for the difference between the new and historical value. Therefore, option B is the correct choice.