The area in the photo is in the bathroom next to the shower stall. The damaged area is approximately 3.5 inches wide. The previous owner of the house had allowed a leak from the shower enclosure to affect the area and over time the drywall and/or plaster had degraded, so I cleaned it out with a putty knife.
The leak from the shower has since been fixed and the area is now dry. Fortunately, there is no sign of more extensive or significant damage to flooring underlayer (plywood) or wooden wall joists.
I am starting a renovation of this bathroom and I am looking for options how to fix this water damage. The area is very confined due to the way it was constructed as a sort of notch. Do I just use a putty knife and try to fill in the area with plaster or something, while attempting to keep the surface as flat and level as possible? Are there any other options?