In the debt write-down example, what happens to liabilities on the balance sheet?

In the debt write-down example, what happens to liabilities on the balance sheet?

• A. Debt decreases by $100.
• B. Debt increases by $100.
• C. Debt remains unchanged.
• D. Debt decreases by $60.

Answer: (A)

Pushing through a debt write-down reduces the amount recorded as a liability. When debt is written down by a certain amount, the liability on the balance sheet is decreased by that same amount, and you recognize a loss on the income statement for the write-down. In this example, the write-down is 100, so the liabilities decrease by 100. The typical entry is to debit a loss (or impairment) for 100 and credit the debt liability for 100, reflecting both the expense and the lower amount owed. That’s why the balance sheet shows debt down by 100. If the write-down were only 60, the liability would decrease by 60, and if there were no write-down, the liability would remain unchanged.

Pushing through a debt write-down reduces the amount recorded as a liability. When debt is written down by a certain amount, the liability on the balance sheet is decreased by that same amount, and you recognize a loss on the income statement for the write-down. In this example, the write-down is 100, so the liabilities decrease by 100. The typical entry is to debit a loss (or impairment) for 100 and credit the debt liability for 100, reflecting both the expense and the lower amount owed. That’s why the balance sheet shows debt down by 100. If the write-down were only 60, the liability would decrease by 60, and if there were no write-down, the liability would remain unchanged.