Oceanside Developments owns a piece of land it had purchased in 2019 for $400,000.When they started to develop the land in 2020,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?
A)No accounting is necessary because the land is recorded at its historical cost,not its market value.
B)The land account should be written down to $150,000 and a loss recognized.
C)The land should be written off completely because now the company cannot use it for the purpose they intended to.
D)The land should be depreciated at a new rate to reflect the decline in its value.

Question

Quizplus · Accepted Answer

According to the accounting principle of conservatism, assets should be recorded at their lower of cost or market value. In this case, since the market value of the land is now $150,000, it should be written down to this amount and a loss should be recognized. Option A is incorrect because even though the land is recorded at historical cost, it should still be written down if its market value is lower. Option C is incorrect because the land still has some value, even if it's lower than its original cost, and therefore, it shouldn't be written off completely. Option D is incorrect because land is not a depreciable asset.

Oceanside Developments Owns a Piece of Land It Had Purchased