Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?
A) The shareholders' loss is the debtholders' gain.
B) The income of the company will increase as the amount of interest payment will reduce.
C) The decrease in market rate will increase the value of equity shares.
D) The debtholders' loss is the shareholders' gain.

Question

Quizplus · Accepted Answer

When a company's creditworthiness is becoming worse, the value of its debt decreases, and as a result, the debtholders' loss is the shareholders' gain. This gain is recognized because the decrease in debt value reduces the company's liabilities, which in turn increases the value of the shareholders' equity.

Which of the Following Arguments Is Presented by FASB to Explain