California Spas recently learned that the value of its building required a write-down because of the discovery that it was on an earthquake fault line.The building cost $2,000,000 and has a book value of $1,570,000 before the discovery and the fair value was $975,000 after the discovery.Which of the following journal entries will be used to record the asset impairment?
A)Debit Impairment Loss and credit Accumulated Depreciation for $595,000
B)Debit Depreciation Expense and credit Building for $595,000
C)Debit Accumulated Depreciation and credit Building for $430,000
D)Debit Impairment Loss and credit Accumulated Depreciation for $430,000

Question

Quizplus · Accepted Answer

Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.The entry includes a debit to Accumulated Depreciation and a credit to Building to eliminate the asset's accumulated depreciation and a debit to Impairment Loss and a credit to Building to write the asset down to its fair value.In this case,debit Accumulated Depreciation and credit Building $430,000 ($2,000,000 − $1,570,000)and debit Impairment Loss and a credit to Building for $595,000 ($1,570,000 − $975,000).

California Spas Recently Learned That the Value of Its Building