Which accounts are affected by recording an impairment loss on a long-lived asset?

• A. Debit Impairment Loss; Credit Asset or Accumulated Depreciation.
• B. Debit Asset; Credit Impairment Loss.
• C. Debit Cash; Credit Revenue.
• D. Debit Retained Earnings; Credit Dividends.

Answer: (A)

When a long-lived asset is impaired, you must reflect a noncash loss that reduces the asset’s carrying amount and appears as an expense on the income statement. The entry to do this debits Impairment Loss (an expense) for the amount of the write-down and credits the asset’s carrying amount. The credit can go directly to the asset account or to Accumulated Depreciation (a contra-asset), both methods lowering the book value of the asset to its recoverable amount. Cash isn’t affected by impairment, because it’s not a cash transaction, and this write-down doesn’t directly alter revenues. It also doesn’t involve Retained Earnings or Dividends. So the appropriate effect is to debit the impairment loss and credit the asset (or its accumulated depreciation). For example, if the asset is written down by $10,000, you would debit Impairment Loss $10,000 and credit Asset $10,000 (or Credit Accumulated Depreciation $10,000).