Problem:
Suppose your company purchased land and a warehouse for $5 million. The price was steep, but you were told that a new interstate highway was going to be built nearby. Two months later, the highway project is cancelled and your property is now worth only $3 million.
Required:
1. How does the concept of accounting conservatism apply to this situation?
2. Suppose instead that you paid $3 million and later learned that the property is worth $5 million because a new highway is going to be built nearby. How does the conservatism concept apply to this new situation? Why?