A company uses the fair value option to record noncurrent liabilites. How can th

Question

A company uses the fair value option to record noncurrent liabilites.

How can the company recognize a gain due to debt values decreasing, according to the financial accounting standards board (FASB)?

A. As the creditor experiences a loss, the sharehold experience a gain.

B As the shareholder experiiences a loss, the creditor experiences a gain.

C. The decrease in the market rate of interest will increase the value of the corporate equity.

D. The interest payments decrease as the market value of the debt decreases.

Explanation / Answer

Answer is option (A). As the creditor experiences a loss, the shareholder experiences a gain

Explanation;

We know that when a company decide to record its debt on fair value then any decrease in the fair value of the debt will be depicted in the financial statements of the company.

Decrease in the value of debt is a gain for the company hence it will lead to a gain to the shareholders on the other hand creditors / debt providers will suffer a loss because their value have been reduced due to decrease in the fair value of debt. Hence option (A) is correct answer.

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