Bayside Ltd.owns a piece of land it had purchased in 2010 for $400,000.When they started to develop the land in 2011, 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

According to the principle of conservatism, assets should not be overstated, therefore, the land account should be written down to reflect its current value of $150,000, and a loss of $250,000 should be recognized on the income statement. Writing off the land completely (choice C) is not appropriate as the land still has some value and could potentially be sold or used for other purposes. Amortizing the land (choice D) does not reflect the decline in value and is not appropriate in this situation. Choice A is incorrect as the historical cost of an asset does not necessarily reflect its current value or usefulness.