In a debt write-down of 100, what is the impact on assets, liabilities, and shareholders’ equity?

In a debt write-down of 100, what is the impact on assets, liabilities, and shareholders’ equity?

• A. Assets decrease by $40; Liabilities decrease by $100; Shareholders' Equity increases by $60
• B. Assets increase by $40; Liabilities decrease by $60; Shareholders' Equity decrease by $20
• C. Assets decrease by $100; Liabilities decrease by $100; Shareholders' Equity increase by $0
• D. Assets increase by $0; Liabilities increase by $100; Shareholders' Equity decrease by $100

Answer: (A)

A debt write-down like this means you’re extinguishing part of a liability for less than its recorded amount, which creates a gain that goes to shareholders’ equity. Here, the liability is reduced by 100, but you’re paying 40 in cash to settle part of the debt. The cash payment reduces assets by 40, while the liability is wiped out by 100. The remaining 60 difference is recognized as a gain on extinguishment, increasing equity by 60. Net effect: assets fall by 40, liabilities fall by 100, and equity rises by 60, which balances the accounting equation.

A debt write-down like this means you’re extinguishing part of a liability for less than its recorded amount, which creates a gain that goes to shareholders’ equity. Here, the liability is reduced by 100, but you’re paying 40 in cash to settle part of the debt. The cash payment reduces assets by 40, while the liability is wiped out by 100. The remaining 60 difference is recognized as a gain on extinguishment, increasing equity by 60. Net effect: assets fall by 40, liabilities fall by 100, and equity rises by 60, which balances the accounting equation.